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AMERICAN   CITIZEN   SERIES 


EDITED   BY 


ALBERT  BUSHNELL  HART,   LL.D. 


PRINCIPLES    OF    ECONOMICS 

EDWIN  R.   A.   SELIGMAN,   LL.D. 


By  the  Same  Author 


Owen  and  the  Christian   Socialists. 

1886 
Railway  Tariffs  and  the  Interstate 

Commerce  Law.     1887. 
Progressive  Taxation  in  Theory  and 
Practice,  2d  ed.     1908. 

French  Translation,  1908;    Spanish 
Translation,  1913. 
The  Shifting  and  Incidence  of  Tax- 
ation, 4th  ed.      1 92 1. 

Italian  Translation,   1906;    French 
Translation,    1911;    Japanese 
Translation,  1910. 
The  Income  Tax,  2d  ed.     1914. 

French  Translation,  1913 
The     Economic     Interpretation     of 
History,  2d  ed.     1907. 

Japanese  Translation,  1905,  Russian 
Translation,  1906;  Spanish  Trans- 
lation, 1907;  French  Translation, 
1910. 
Essays  in  Taxation,  9th  ed.  1921. 
Russian  Translation,  1909;  French 
Translation,     1914. 


ametican  Citizen  ^erie0 


Principles    of  Economics 


WITH  SPECIAL   REFERENCE 
TO  AMERICAN   CONDITIONS 


BY 
EDWIN    R.    A.    SELIGMAN,    LL.D. 

MCVICKAR   PROFESSOR   OF   POLITICAL   ECONOMY, 
COLUMBIA  UNIVERSITY. 


NINTH    EDITION,    REVISED 


LONGMANS,    GREEN  AND   CO. 

FOURTH    AVENUE    &    30TH    STREET,    NEW   YORK 

39    PATERNOSTER    ROW,    LONDON 

BOMBAY,    CALCUTTA,    AND    MADRAS 

I921 


COPYRIGHT,    1905, 
BY    LONGMANS,    GREEN,    AND    CO. 

COPYRIGHT,    1909, 
BY    LONGMANS,    GREEN,    AND    CO. 

COPYRIGHT,    I9I4, 
BY    LONGMANS,    GREEN,    AND    CO. 

First  Edition,  October,  1905 

Second  Edition,  revised,  September,  1906 

Third  Edition,  revised  and  enlarged, 

September,  1907 
New  Impression,  revised,  August,  1908 
Fourth  Edition,  revised  and  enlarged,  1909 
Fifth  Edition,  revised,  191 2 
Sixth  Edition,  revised  and  rewritten,  1914 
Seventh  Edition,  revised,  191 6 
New  Impression,  January,  19 19 
Eighth  Edition,  revised,  1919 
Ninth  Edition,  revised,  1921 
Russian  Translation,  1907 
Japanese  Translation,  1907 
French  Translation,  1921 


nL6 


d 


PRLf-ACE   TO   THE   SIXTH   EDITION 

IN  the  present  edition  the  introductory  matter  has  been 
re-written.  In  the  body  of  the  book  chapters  have 
been  added  on  the  Control  of  Trusts,  Labor  Legislation 
and  Labor  Insurance.  This  has  necessitated  a  compression  of 
the  chapters  on  money  and  credit,  but  room  has  nevertheless 
been  found  for  a  treatment  of  the  Federal  Reserve  Act.  In 
other  respects  also  the  discussion  and  references  have  been 
brought  down  to  date.  It  is  my  hope  that  in  this  revised 
form  the  work  may  continue  to  enjoy  the  favor  which  has 
hitherto  been  so  generously  accorded  to  it. 


EDWIN   R.   A.   SELIGMAN. 


Columbia  UNrvERSiXY, 
New  York,  July,  19 14 


FROM   THE 
PREFACE   TO   THE    FOURTH   EDITION 

IN  the  explanatory  note  which  accompanied  the  first 
edition  of  this  work,  it  was  stated  that  "The  object 
of  the  author  is  not  only  to  give  the  salient  facts  of 
economic  life,  and  to  analyze  them  in  the  light  of  modern 
research,  but  also  to  present  a  point  of  view  from  which 
to   approach    the    great    questions    of    modern    economic 


vi  Preface  to  the  Fourth  Edition. 

policy.  In  the  second  place  the  author  believes  that  the 
function  of  economics  is  not  only  to  explain  what  actually 
exists,  but  to  show  how  it  has  come  to  exist,  .and  to  fore- 
cast both  the  probable  and  the  ideal  future.  Throughout 
the  entire  work  the  author  endeavors  to  reconcile  the  his- 
torical and  the  a  priori  methods,  and  to  provide  an  analysis 
of  existing  industrial  society  in  the  light  of  a  treatment 
which,  while  seeking  to  emphasize  the  importance  of  wealth, 
lays  especial  emphasis  on  the  human  side  of  the  subject  and 
the  subordination  of  wealth  to  man."  The  justification  of 
this  attempt  is  evident  from  the  unexpected  demand  for  the 
work,  which  has  led  to  a  constant  succession  of  new  editions. 
Of  the  suggestions  and  criticisms  that  have  been  made  in 
the  various  reviews  of  the  book,  only  one  seems  to  call  for 
mention.  Some  surprise  has  been  expressed  that  so  little 
attention  has  been  devoted  to  the  problems  of  taxation  —  a 
field  which  the  author  has  elsewhere  somewhat  assiduously 
cultivated.  The  intentional  omission  is  due  to  the  convic- 
tion that  it  is  inexpedient  to  attempt  a  treatment  of  public 
finance  in  a  short  treatise  on  the  principles  of  economics. 
The  science  of  finance  is  indeed  in  one  sense  a  part  of  eco- 
nomics, but  in  another  and  better  sense  a  quasi-independent 
science.  The  attempt  to  treat  the  problems  of  finance  in  a 
few  chapters  at  the  end  of  a  treatise  on  economics,  as  do 
most  of  the  English  works,  is  bound  to  be  unsatisfactory  in 
the  extreme.  There  is  no  more  reason  so  to  include  Finance 
than  there  would  be  to  include  Statistics  or  any  other  semi- 
independent  discipline.  A  treatment  of  finance  that  is  in 
any  sense  adequate  would  require  a  volume.  It  is  my  hope 
in  the  not  far  distant  future  to  issue  such  a  companion 
volume. 


Contents 


SUGGESTIONS   FOR   STUDENTS   AND    GENERAL 
REFERENCES 

Page 
I.   General  Treatises  in  English xix 

II.  General  Treatises  in  Foreign  Languages xxii 

III.  Periodicals xxiii 

IV.  Diction.^ries  and  Cyclopedias     xxix 

V.  Government  Documents 

A.  Local  and  State  Publications xxix 

B.  National  Departmental  Publications      xxxii 

C.  Congressional  Documents xli 

D.  Indexes xliv 

E.  British  OlEcial  Publications      xliv 

VI.   Semi-Official  Publications xlvi 

VII.   Bibliographies  and  Finding  Lists xlvii 

VIII.   List  of  Select  Books 1 

Parti 

INTRODUCTION 

Chapter 
I.   Fundamental  Concepts. 

1.  References 3 

2.  Economic  Life 3 

3.  Economics  or  Political  Economy? 6 

4.  The  Meaning  of  Wealth 8 

5.  Wealth  and  Man 13 

6.  The  Measure  of  Wealth  —  Income  and  Capital .    ...  15 

7.  Wealth,  Mone}',  and  Property iq 

8.  Public  and  Private  Wealth 21 

vii 


viii  Contents  Parts  I.,  II. 

Chapter  Pagi; 

II.   Economic  Law  and  Method. 

9.  References 24 

10.  Meaning  of  Economic  Law 24 

11.  Methods  of  Economic  Investigation 28 

12.  Relation  of  Economics  to  Other  Sciences 2g 

13.  Relation   of   Economics   to   Politics   and   Other   Moral 

Sciences 31 

14.  Scope  of  Economics 35 


Part  II 

ELEMENTS   OF   ECONOMIC  LIFE. 

BOOK  I.  —  FOUNDATIONS  OF  ECONOMIC   LIFE. 

III.  The  Natural  Environment. 

15.  References 37 

16.  Climatic  and  Geological  Conditions 37 

17.  The  Flora,  the  Fauna,  and  the  Geographical  Location  41 

18.  Changes  in  Environment 43 

19.  Changes  in  Location 46 

IV.  The  Population. 

20.  References .  49 

21.  Density  of  Population 49 

22.  Concentration  of  Population 52 

23.  Distribution  of  Population 54 

24.  Increase  of  Population 56 

25.  Migration  of  Population 60 

26.  The  Law  of  Population 62 

BOOK  II.  —  DEVELOPMENT  OF   ECONOMIC  LIFE  AND 
THOUGHT. 

V.  The  Economic  Stages. 

27.  References 67 

28.  Economic  Development 67 

29.  Primitive  Technic^iie 69 

30.  Transition  from  the  Lower  Stages  of  Civilization .    ...  72 

31.  Self-sufhcing  or  Isolated  Economy 75 

32.  Trade  or  Commercial  Economy 77 

35.  Capitalist  or  Industrial  Economy 81 


Part  II.  Contents 


IX 


Chapter  Page 
VI.  The  Historical  Forms  of  Business  Enterprise. 

34.  References 85 

35.  Primitive  Economic  Activity  —  The  Clan 85 

36.  The  Family 87 

37.  Help  or  Hire  System 90 

38.  Handicraft  System 91 

39.  Domestic  System 93 

40.  Factory  System 95 

41.  Associated  and  Corporate  Enterprise 96 

VII.   Economic  Development  of  the  United  States. 

42.  References 100 

43.  Early  Period  of  American  Economic  Life 100 

44.  Growth  of  American  Industry  in  the  Nineteenth  Century  102 

45.  Recent  Development  of  American  Industry 104 

46.  Modern  Problems  of  America 106 

VIII.   Development  of  Economic  Thought. 

47.  References 109 

48.  Economic  Theory  in  Classic  Antiquity 109 

49.  Medieval  Economic  Theory 112 

50.  The  Mercantile  Doctrine 116 

51.  Adam  Smith  and  the  Physiocrats 118 

52.  Ricardo  and  Modern  Economics 121 

BOOK   III.  —  CONDITIONS  OF   ECONOMIC  LIFE. 

IX.   Private  Property. 

53.  References 125 

54.  Origin  of  Private  Property 125 

55.  Growth  of  Property  in  Land.' 128 

56.  Theories  of  Private  Propertj* 131 

57.  Limits  of  Private  Property* 134 

58.  Content  of  Property  Right? 136 

X.   Competition. 

59.  References 139 

60.  Nature  of  Competition 139 

61.  Forms  of  Competition 141 

62.  Dangers  of  Competition  ' 145 

63.  Limits  of  Competitioi* 147 

64.  Substitutes  for  Competition 150 


X  Contents  Parts  II.,  III. 

Chapter  Pagi 
XI.    Freedom. 

65.  References 15  i 

66.  Origin  and  Growth  of  Slavery 154 

67.  Decay  and  Disappearance  of  Slavery 158 

68.  Liberty  of  Economic  Action 163 

69.  Various  Kinds  of  Economic  Freedom 165 

70.  Individual  Liberty  as  a  Social  Concept 171 


Part  III 

STRUCTURE    AND    PROCESS     OF     ECONOMIC     LIFE. 
BOOK   I. —  VALUE:    GENERAL   PRINCIPLES. 

XII.   The  Meaning  of  Value. 

71.  References 173 

72.  Original  Meaning  of  Value 173 

73.  Marginal  Utility  —  Law  of  Diminishing  Utility    .    .    .    .175 

74.  Individual  and  Social  Value 179 

75.  Value  in  Exchange 182 

76.  Value  and  Price 184 

77.  Value  and  Marginal  Increments  of  Wealth 185 

XIII.  The  Measure  of  Value. 

78.  "References 189 

79.  Meaning  of  Cost 189 

80.  Individual  and  Social  Cost 192 

81.  Cost  and  Surplus 194 

82.  Cost  and  Utihty ig8 

83.  Social  Surplus  and  Progress 201 

XIV.  The  Capitalization  of  Value. 

84.  References 204 

85.  Value  and  Rent 204 

86.  Law  of  Depreciation 206 

87.  Law  of  Future  Estimates 209 

88.  Law  of  Diminishing  Returns 212 

89.  Forms  of  Value ., 214 

90.  Value  as  a  Differential    .., 217 

91.  Relation  of  Rental  and  Capital  Values 220 


Part  III.  Contents 


XI 


Chapter  Page 

XV.   Determination  of  Market  Value. 

92.  References 223 

93.  Demand  and  Supply 223 

94.  Market  and  Normal  Price 224 

95.  Conditions  of  Exchange  —  Law  of  Comparative  Utilities 

and  Comparative  Costs 226 

96.  Rate  of  Exchange  —  Barter 227 

97.  One  Seller  and  One  Buyer 229 

98.  Monopoly 231 

99.  Competition 234 

100.  Conclusions 235 

XVI.  Determination  of  Normal  Value. 

loi.  References 241 

102.  Normal  Demand  —  Elasticity  of  Demand 241 

103.  Normal  Supply  —  Cost  of  Production J44^ 

104.  Law  of  Marginal  or  Maximum  Cost /  247 

105.  Law  of  Minimum  Cost 249 

106.  Elasticity  of  Supply  —  Law  of  Varying  Cost 251 

107.  Law  of  Joint  Cost 253 

108.  Equilibrium  of  Normal  Demand  and  Normal  Supply    .  255 

109.  Influence  of  Normal  Price  upon  Market  Price     ....  256 
no.  Normal  Monopoly  Value 258 

XVII.  The  Gen^erax  Law  of  V.a.ll-j;. 

111.  References 262 

112.  Value  and  Cost  of  Production 262 

113.  Value  and  Efficiency 264 

114.  Efficiency  and  Capitalization 268 

115.  Valuation  and  Taxation 269 

116.  Valuation  and  Regulation 273 

117.  Valuation  and  Investment 275 

BOOK   II. —  VALUE   AND   PRODUCTION. 

XVIII.  Character  ant)  Factors  of  Production. 

118.  References 278 

119.  Production:  Its  Meaning  and  Relation  to  Consumption  278 

120.  Kinds  of  Production 281 

121.  Factors  of  Production 283 

122.  Production  and  the  Producer 285 


xii  Contents  Part  III. 

Chapter  Pac;!. 

XIX.  Labor. 

123.  References 288 

124.  Meaning  of  Labor 28S 

125.  Cost  of  Labor 289 

126.  Efficiency  of  Labor 292 

127.  Division  of  Labor  —  Nature  and  Advantages     ....  293 

128.  Division  of  Labor  —  Defects      298 

129.  Combination  of  Labor 299 

130.  Supply  of  Labor 301 

XX.  Land. 

131.  References 304 

132.  Land  as  a  Separate  Factor  of  Production 304 

133.  Fertility  of  Land 308 

134.  Situation  of  Land 311 

135.  Cultivation  of  Land 313 

XXI.  Capital. 

136.  References 317 

f  137.    Kinds  of  Capital .    ; 317 

138.  Function  of  Capital 320 

139.  Creation  and  Growth  of  Capital 323 

140.  Nature  and  Influence  of  Capital 326 

141.  Investment  of  Capital 329 

XXII.  Enterprise  —  The  Concentration  of  Production. 

142.  References 333 

143.  The  Meaning  of  Concentration 333 

144.  Large-Scale  Production 335 

145.  Large-Scale  Agriculture 338 

. I  146.    Consolidation  and  Integration  of  Production 341- 

147.  Combination  and  Efficiency 345 

148.  Limits  of  Combination 349 

BOOK  III.  — VALUE  AND  DISTRIBUTION. 

XXIII.  Profits. 

149.  References 352 

150.  The  Shares  in  Distribution 352 

151.  Ordinary  Profits 354 

152.  Aleatory  Profits 358 

153.  Speculative  Profits:  Nature 360 


Part  III.  Contents  xiii 

Chapter  Page 

Profits  {Continued). 

154.  Speculative  Profits:  Function 364 

155.  Monopoly  Profits 368 

156.  Regulation  and  Justification  of  Profits 370 

XXIV.  Rent. 

157.  References 373 

158.  Nature  of  Rent 373 

159.  Relation  of  Land  Rent  to  Other  Rents 375 

160.  Rent  and  Price 378 

161.  Growth  of  Land  Rent 381 

162.  Land  Rent  and  Land  Tenure 385 

163.  Justification  of  Land  Rent 389 

XXV.  Interest. 

164.  References 394 

165.  Nature  of  Interest        394 

166.  Interest  and  Forbearance 398 

167.  Interest  and  Productivity 401 

168.  Course  of  Interest 405 

169.  Tendency  of  Interest  to  a  Minimum 407 

170.  Regulation  of  Interest 410 

XXVI.  Wages. 

171.  References 4^3 

172.  Nature  of  Wages 413 

173.  W^ages  and  Cost 416 

174.  Wages  and  Efficiency 418 

175.  Rate  of  Wages 421 

176.  Course  of  Wages 423 

177.  Variations  in  Wages 425 

178.  Wages  and  Profits 429 

XXVII.  Wages.  —  The  Labor  Problem. 

»    - 

179.  References 432 

180.  Labor  Organizations 43^^ 

181.  Strikes 437 

182.  Boycotts 440 

183.  Profit  Sharing  and  Co-operation 443 

184.  Arbitration  and  Conciliation 446 


xiv  Contents  Part  III. 

BOOK  IV. —  VALUE  AND   EXCHANGE. 
Chapter  Paw; 

XXVIII.  Money.  —  Nature  and  Value. 

185.  References 44(j 

186.  Origin  and  Functions  of  Money 44() 

187.  Value  of  Money 453 

188.  The  Quantity  Theory 458 

189.  The  Price  Level 461 

190.  Distribution  and  Stability  of  Money 464 

XXIX.  Money.  —  Practical  Problems. 

191.  References 470 

192.  Coinage  Problems 470 

193.  Choice  of  the  Money  Standard 475 

194.  Bimetallism 479 

195.  Adoption  of  the  Gold  Standard 483 

196.  Paper  Money 488 

XXX.  Credit  and  Banking. 

197.  References      496 

198.  Nature  and  Forms  of  Credit 496 

199.  Development  of  Banking 501 

200.  Modern  Bank  Operations 506 

201.  Bank  Reserves 511 

202.'  Credit  and  Prices 518 

XXXI.  Credit  and  Currency. 

203.  References 521 

204.  Banks  of  Issue 521 

205.  Regulation  of  Note  Issues 525 

206.  The  American  Systems 528 

207.  The  Money  Rate 533 

208.  The  Federal  Reserve  Act 538 

209.  Credit  and  Crises      543 

209!  The  Federal  Farm  Loan  Act 546* 

XXXII.  International  Trade. 

210.  References 547 

211.  Basis  of  International  Trade 547 

212.  Rate  of  International  Exchange 552 

213.  Growth  of  Free  Trade      556 

214.  The  .\rgument  for  Protection 560 

215.  The  .\rgument  for  Free  Trade 566 

216.  Conclusion 567 


Parts  III.,  IV.               Contents  xv 

Chapter  Page 

XXXIII.  Transportation. 

217.  References 572 

218.  Transmission  of  Intelligence  —  The  Post-Office.     .    .    .  572 

219.  Railway  Development 575 

220.  Nature  of  Railway  Business 577 

221.  Principle  of  Railway  Charges 581 

222.  Classification 584 

223.  Discrimination 587 

224.  Railway  Regulation 593 

XXXIV.  Insurance. 

225.  References 598 

226.  Nature  of  Insurance 598 

227.  Growth  of  Insurance 601 

228.  Theory  of  Insurance 606 

229.  Methods  and  Regulation  of  Insurance 609 

Part  IV 

GOVERNMENT   AND   WEALTH 
XXXW   Socialism  and  Public  Ownership. 

230.  References 612 

231.  Socialism 612 

232.  Development  of  Public  Ownership 615 

233.  Conditions  of  Public  Ownership 619 

234.  Municipal  Monopolies 623 

235.  Government  Regulation 627 

236.  Bounties  and  Subsidies 629 

XXXVI.  The  Control  of  Trusts. 

237.  References 632 

238.  The  Causes  of  Trusts 632 

239.  The  Effects  of  Trusts 634 

240.  The  Prohibition  of  Trusts 638 

241.  The  Regulation  of  Trusts 640 

XXXVII.  Labor  Legislation. 

242.  References'. 643 

243.  The  Employment  of  Children  and  Women 643 

244.  The  Protection  of  Life,  Health  and  Comfort 646 

245.  Regulation  of  the  Hours  of  Labor 648 

246.  The  Minimum  Wage 650 


xvi                             Contents                       Part  IV 

Chapter                                                         .  Page 

XXXVIII.  Social  Insurance. 

247.  References 655 

248.  The  Reasons  for  Social  Insurance 655 

249.  Accident  Insurance 657 

250.  Health  Insurance      660 

251.  Old  Age  Insurance 662 

252.  Invalidity  Insurance 664 

253.  Unemployment  Insurance 665 

XXXIX.  Poverty  and  Progress. 

254.  References 669 

255.  Luxury 669 

256.  The  Facts  of  Poverty      674 

257.  The  Causes  of  Poverty       678 

258.  The  Relief  of  Poverty 682 

259.  The  Prevention  of  Poverty 685 

260.  The  Future  of  Economic  Life 688 

261.  The  Role  of  Economics 692 

INDEX 69s 


Maps  and    Diagrams 


Page 
Distribution  of  Population colored,  facing     50 

Number  of  Inhabitants  to  the  Square  Mile, 

by  States  and  Territories  in  1910 "         52 

Population  according  to  Age  Distribution 55 

Foreign  Immigration  to  the  United  States, 

1840-1920 Jollowing    60 

Increase  of  Population  in  Principal  Coun- 
tries of  Europe,  1 800-1920 facing     61 

Population: 

(i)  Total  Foreign  Born,  1850-1910       1 

(2)  Proportion  each  of  leading  nation- [•    .    .    .    colorca ,  following    62 
alities  and  foreign  born  J 

Constituents  of  the  Population  of  States 

and  Territories,  1910 colored,         "  64 

Annual  Value  of  Products  1  ,     . 

> facing  104 

Value  of  Exports    of    Manufactures  J 

Production  of  Com     \  .    .  , 

( facing  106 

Production  of  Wheat ) 

Production  of  Oats      \ 

) "       107 

Production  of  Cotton  J 

Capital  Invested  at  each  Census     \  ,,  ■         „ 

( 108 

Average  Number  of  \\'age  Earners  ) 

Value  of  Products  1 

; '        109 

Proportion  of  Wage  Earners  to  Population  J 

Hand  and  Machine  Labor,  Selected  Units  (a) "       296 

Hand  and  IMachine  Labor,  Selected  Units  {b) "       297 

Wages,  Hours  of  Work,  etc colored,  "       424 

Results  of  Strikes,  etc colored,  "       438 

Relative  Wholesale  and  Retail  Price  of  Fresh 

Beef,  1890-1903 "      462 

Relative   Prices   of   Raw   and   Manufactured    Com- 

inodities,  1890-1912 463 

xvii 


XVlll 


Maps  and  Diagrams 


Pace 


General  Level  of  Prices  in  England,  1 790-1 920  ....  following  464 
Comparative  Movement  of  Wholesale  Prices  in  the 

United  States,  Great  Britain  and  Germany,  1890-1911  .  .  facing  466 
Movement  of  Wholesale  and  Retail  Prices  in  the 

United  States,  1890-1913 "       467 

Wholesale  Prices,  1914-1921 "        468 

Production  of  Silver,  1 875-1919      "       476 

Production  of  Gold  and  Silver,  1845-1919 "       476 

Production  of  Gold,  1880-1919 "       477 

Production  of  Gold  and  Silver  since  the  Discovery  of  America     "       478 

The  Fall  in  the  Value  of  Silver  since  1 873 "       479 

Bank  Notes,  Paper  Money,  etc.,  1878-1920 "       532 

Exports  and  Imports  of  ISIerchandise,  1872-1920 "        551 

Railway  Consolidation,  1920 "       578 

Reduction  of  Freight  Rates,  1867-1900 ^oUoiving  580 

Percent  of  Total  Expenditure,  etc..  Normal  Families,  colored,  facing  674 
Poverty  Chart  (reproduced  by  permission  from 

Rowntree's  "Poverty") 680 


SUGGESTIONS  FOR  STUDENTS  AND  GENERAL 
REFERENCES 

I.   General  Treatises  in  English 

Of  the  older  works  the  treatises  of  Adam  Smith  and  of  some 
of  the  so-called  Classical  School  are  still  indispensable  to 
students.     The  three  founders  are: 

SiOTH,  .-Vdam.  An  hiquiry  into  the  Nature  and  Causes  of  the  Wealth 
of  Nations.  (London,  1776;  recent  editions,  with  introduction 
and  notes  by  Edmn  Cannan,  2  vols.,  1904;  and,  with  introduction, 
by  Edwin  R.  A.  Seligman  in  Evcrytnan's  Library,  2  vols.  n.  d.  [1910].) 

Malthus,  Thomas  Robert.  An  Essay  on  the  Principle  of  Popula- 
tion, or  a  View  of  its  Past  and  Present  Effects  on  Human  Happiness. 
(London,  1798;  8th  ed.,  1878.) 

RiCARDO,  Da\ti).  Principles  of  Political  Economy  and  Taxation.  (Lon- 
don, 181 7.)  —  This  work,  together  with  his  other  important  writings, 
has  been  edited  by  J.  R.  McCulloch  in  one  volume  under  the  title 
of  The  Works  of  David  Ricardo  with  a  Notice  of  the  Life  and  Writings 
of  the  Author.     (1846;  frequently  reprinted  since.) 

The  principal  modern  expounders  of  the  general  system  set 
forth  by  Smith,  Malthus  and  Ricardo  are: 

Mill,  John  Stuart.  Principles  of  Political  Economy  with  some  of 
their  Applications  to  Social  Philosophy.  (London,  1848;  5th  ed., 
1880.)  —  Tills  was  the  most  widely  read  work  from  1850  to  1890. 

Senior,  Nassau  William.  Political  Economy.  (London,  1850;  6th  ed., 
1872.)  —  Acute  and  original. 

Cairnes,  J.  E.  Some  Leading  Principles  of  Political  Economy  newly 
Expounded.     (London,  1S74.)  —  Abstract,  but  weight}'. 

SiDGWiCK,  Henry.  The  Principles  of  Political  Economy.  (London, 
1883.)  —  Critical  and  philosophical,  but  somewhat  remote  from 
actual  life. 

xix 


XX  Suggestions 

The  reaction  against  the  Classical  School  was  inaugurated  in 
England  by 
Jevons,  W.  Stanley.     The   Theory  of  Political  Economy.     (London, 

1871;  4th  ed.,  1911.)  —  A  work  of  the  first  magnitude.    The  same 

author's  posthumous   Principles  of  Economics   (London,    1905)    is 

only  a  torso. 

Of  modern  treatises  the  best  are  as  follows: 

Marshall,  Alfred.     Principles  of  Economics.  (Vol.  I,  London,  1890; 
8th  ed.,  1920.)  —  The  fullest  and  most  elaborate  of  recent  works. 

PiERSON,  N.  G.  Principles  of  Economics.  (Translated  by  A.  A.  Wotzel, 
2  vols.,  London,  1902-1912.)  —  Dr.  Pierson  was  formerly  Prime 
Minister  of  the  Netherlands.  A  virile  work,  especially  strong  in 
the  financial  sections. 

Nicholson,  J.  Shield.  Principles  of  Political  Economy.  (3  vols., 
London,  1893-1901.)  —  On  the  lines  of  Mill,  but  brought  down 
to  date  and  with  much  historical  material. 

Pantaleoni,  Maffeo.  Pure  Economics.  (Translated  by  T.  Boston 
Bruce.  London,  1898.)  —  An  acute  and  profound  work  on  funda- 
mental principles. 

Bohm-Bawerk,  Eugen  von.  The  Positive  Theory  of  Capital.  (Trans- 
lated by  W.  Smart.    London,  1891.) 

Wieser,  Friedrich  von.  Natural  Value.  (Translated  by  C.  Mal- 
loch,  London,  1893.)  —  This  book  and  the  one  immediately  preceding 
are  the  two  chief  works  of  the  Austrian  School. 

Three  recent  elementary  books  are: 
C.ANNAN,  Edwin.    Wealth.    A  Brief  Explanation  of  the  Causes  of  Economic 
Welfare.    (London,  1914.)    Suggestive  and  well  written. 

Chapman,  S.  J.  Outlines  of  Political  Economy.  (London,  191 1;  3d  ed., 
1918.)     A  useful  compendium. 

Clay,  H.  Economics,  an  Introduction.  (London,  1916.)  Emphasizes 
the  ethical  point  of  view. 

Still  briefer  are: 
CuNNisoN,  J.    Economics.    (London,  1920.) 

Kirkcaldy,  A.  W.  Wealth,  Its  Production  and  Distribution.  (London, 
1920.) 

Of  American  treatises  the  most  important  are: 
Walker,  Francis  A.    Political  Economy.     (New  York,  1883;  3d  ed. 
1888.)  —  Until  recently,  the  chief  American  production. 


Treatises  in  English  xxl 

Clark,  John  B.  The  Distribution  of  Wealth.  (New  York,  1899.)  — 
Of  fundamental  and  epoch-making  importance.  The  same  author's 
Essentials  of  Economic  Theory  (New  York,  1907)  covers  a  broader 
field. 

Hadley,  Arthur  Twining.  Economics:  An  Account  of  the  Relations 
between  Private  Property  attd  Public  Welfare.  (New  York, 
1896.)  —  Admirably  written,  but  with  a  not  entirely  satisfactory 
arrangement. 

Ely,  Richard  T.  Outlines  of  Economics.  (New  York,  1893;  3d  ed., 
revised  by  the  author'  and  T.  S.  Adams,  M.  O.  Lorenz,  and  A.  A. 
Young,  1916.)  —  In  its  new  form,  valuable  and  interesting. 

Seager,  Henry  Rogers.  Principles  of  Economics.  (New  York,  1904; 
4th  ed.,  1913.)  —  Displays  a  firm  grasp  of  theory  and  a  wide  ac- 
quaintance with  facts.  In  many  respects  the  most  available  of  e.xist- 
ing  text-books.  The  same  author  has  also  published  Economics. 
Briefer  Course  (New  York,  1909). 

Fetter,  Frank  A.  The  Principles  of  Economics.  (New  York,  1904. 
Rewritten  as  Economic  Principles,  2  vols.,  1915.)  —  Novel  and 
suggestive. 

Taussig,  F.  W.  Principles  of  Economics.  (2  vols..  New  York,  191 1, 
2d  ed.,  1914.)  —  Clear  and  sensible,  but  on  old  Unes. 

Fisher,  Irving.  Elementary  Principles  of  Economics.  (New  York, 
191 2.)  —  Lays  especial  stress  on  value  and  money. 

During  the  past  few  years  a  number  of  series  for  more  pop- 
ular consumption  have  appeared.  They  are  not  yet  completed, 
and  the  whole  number  of  volumes  is  not  yet  definitely  settled. 
Among  these  are:  Appleton's  Business  Series,  and  Problems  of 
the  War  and  Reconstruction,  Macmillan's  Citizen's  Library  of 
Economics,  Politics  and  Sociology,  the  Rural  Text  Book  Series,  and 
the  American  Social  Progress  Scries.  Longman's  American  Citizen 
Series,  Holt's  American  Public  Problem  Series,  Shaw's  .American 
Industry  Series,  Methuen's  Series  in  Economics,  and  Ginn's 
Selections  and  Readings  in  Economics. 

On  American  Economic  History  attention  is  called  especially 
to  A  Documentary  History  of  American  hulustrial  Society  (Cleve- 
land, 10  vols.,  1910-1911),  and  The  Economic  History  of  the 
United  States,  under  the  auspices  cf  the  Carnegie  Institution 
(about  10  vols.,  1914-). 


xxii  Suggestions 

Convenient  collateral  reading  will  be  found  in: 

Marshall,  Wright  and  Field.     Malcriah  for  the  Study  of  Elementary 
Economics.     (Chicago,  1913.) 

Hamilton,  W.  H.     Readings  on  Current  Economic  Problems.     (University 
of  Michigan,  1914.) 

Moulton,  H.  G.     Principles  of  Money  and  Banking.     (Chicago,  1916.) 

Phillips,  C.  A.     Readings  in  Money  and  Banking.     (New  York,  1916.) 

Clark,  Hamilton  and  Moulton.     Readings  in  the  Economics  of  War 

and  Reconstruction.     (Chicago,  1919.) 
Materials  for  the  Study  of  Business.    Several  volumes.     School  of  Com 

merce  and  Administration.    (Chicago,  1921.) 

The  more  important  works  on  special  topics  will  be  found  in 
the  References  at  the  head  of  each  chapter. 


II.   General  Treatises  in  Foreign  Languages 

The  leading  foreign  works  are: 

Wagner,  Adolf.  Grundlegung  der  Politischen  Oekonomie.  (3  vols., 
Leipsic;  3d  ed.,  1892-1894.)  —  By  the  chief  advocate  of  "Profes- 
sorial Socialism."  Erudite,  with  remarkable  bibliographies.  A 
French  translation  appeared  in  1905.  The  same  author's  Theoretische 
Sozialokonomik,  containing  his  university  lectures,  appeared  in  two 
volumes  in  190  7- 1909. 

RosCHER,  WiLHELM.  Grundlageu  der  Nationalokonomie.  Ein  Hand- 
und  Lesebiich.  (5  vols.,  Stuttgart,  1854-1894;  with  new  editions 
of  the  earlier  volumes  almost  every  year  until  his  death  in 
1894.)  —  By  one  of  the  founders  of  the  Historical  School.  Con- 
tains an  imposing  array  of  historical  notes.  The  first  volume  has 
appeared  in  English  dress  in  2  volumes. 

Cohn,  Gustav.  Grundlegung  der  Nationalokonomie.  Ein  Lehrbuch 
fur  Studirende.  (3  vols.,  Stuttgart,  1885-1898.)  —  By  the  best 
styhst  among  the  German  economists.  Conservative  and  interest- 
ing. The  second  volume  has  been  translated  into  English  under  the 
title  The  Science  of  Finance. 


Foreign  Treatises  xxiii 

ScHMOLLER,  GuSTAV.  Grimdriss  der  allgemeinen  Volkswirthschaftslehre. 
(2  vols.,  Leipsic,  1900-1904;  26.  ed.,  1908.)  —  A  remarkable  work 
by  the  former  leader  of  the  Historical  School.  Brilliant  and  fasci- 
nating, but  weak  in  the  theoretical  parts. 

Philippovich,  Eugen  von.  Grimdriss  der  Politischen  Oekonomie' 
(3  vols.,  Tubingen,  1893-1907;  sth-gth  ed.,  1911-1915.)  —  Sane, 
impartial  and  concise.    In  many  respects  the  best  German  work. 

Pesch,  Heinrich.  Lehrhuch  der  N ationalokonomie.  3  vols.,  Freiburg 
VB,  1904-1913;  2d  ed.,  1914.)  —  From  the  Catholic  standpoint. 

The  Grimdriss  der  Socialokonomik  (10-12  parts,  Tubingen,  1914-1921) 
is  a  comprehensive  series  by  the  younger  German  economists,  cover- 
ing the  whole  field  of  economics. 

Lerov-Beaulieu,  Paul.  Traite  Theorique  et  Pratique  d' Economic 
Politique.  {5  vols.,  Paris,  1895;  6th  ed.,  1914.) — A  pellucid  work 
by  the  former  chief  of  the  orthodo.x  school  in  France. 

GiDE,  CH.'iRLES.  Principes  d' Economic  Politique.  (Paris,  1887;  iithed., 
1908.)  —  The  most  widely  read  European  text-book.  American 
translations  appeared  in  1889  and  1904.  The  author's  Coiirs  d'Eco- 
nomie  Politique  (Paris,  4th  ed.,  1918-1919,  2  vols.)  is  an  enlarged 
version  of  the  same  book.    An  English  translation  appeared  in  19 r4. 

Landry,  Adolphe.  Manuel  d'Economique.  (Paris,  1908.) — An  ex- 
cellent French  work  by  a  French  statesman. 

Pareto,  Vilfredo.  Cotirs  d' Economie  Politique.  (2  vols.,  Lausanne* 
1896-1897.)  —  An  acute  work,  combining  the  mathematical  point 
of  view  with  historical  details.  His  Manuel  d'Econotnie  Politique 
(Paris,  1909)  is  a  translation  of  a  briefer  Italian  work. 

COLSON,  C.  Cours  d' Economie  Politique.  (3  vols.,  Paris,  1907;  3d 
ed.,  6  vols.,  1915-1919.)  —  By  a  prominent  engineer. 

Perreau,Camille.    Cours  d'Sconomie  Politique.    (2  vols.,  Paris,  1916.) 
Truchy,  H.    Cours  d' Economie  Politique.     (Paris,  192 1.) 


III.   Periodicals 
Classified  by  countries  the  chief  periodicals  are  as  follows: 

United  States 
American  Economic  Association  Publications.    The  publications  of  this 
Association,  formed  in  1886,  include  the  Reports  of  the  Proceedings  of 
the  Annual  Meetings  and  a  series  of  independent  monographs.     Up 


xxiv  Suggestions 


to  1897  these  were  published  at  bi-monthly  intervals.  In  1897  a 
series  of  shorter  Studies  was  inaugurated,  and  larger  volumes  were 
occasionally  published  under  the  name  of  New  Series.  In  1901  the 
Studies  were  discontinued,  and  a  Third  Series  was  commenced. 
In  1908  a  quarterly  periodical  known  as  The  Economic  Bulletin  was 
added.    In  191 1  this  was  replaced  by  The  American  Economic  Review. 

The  Quarterly  Journal  of  Economics.  Published  for  Harvard  University. 
(Boston,  1886-). 

Political  Science  Quarterly.  Edited  by  the  Faculty  of  Political  Science 
of  Columbia  University.     (New  York,  1886-.) 

The  Annals  of  the  American  Academy  of  Political  and  Social  Science. 
(Bi-monthly,  Philadelphia,  1890-.) 

The  Journal  of  Political  Economy.  Published  for  the  University  of 
Chicago.     (Quarterly  to  1906,  monthly  thereafter,  Chicago,  1892-.) 

The  American  Journal  of  Sociology.      (Bi-monthly,   Chicago,    1896-.) 

Quarterly  Publications  of  the  American  Statistical  Association.     (Boston, 
•  1 888-.) 

American  Labor  Legislation  Review.     (Quarterly,  New  York,  191 1-.) 

The  Child  Labor  Bulletin.     (Quarterly,  New  York,  191 2-.) 

Municipal  Research.  Issued  by  the  Bureau  of  Municipal  Research. 
(Monthly,  New  York,  1913-1919.) 

Johns  Hopkins  University  Studies  in  IListorlcal  and  Political  Science. 
(Baltimore,  1883-.  One  volume  a  year,  composed  of  several  numbers. 
39  vols,  and  several  extra  volumes  to  1921.) 

Columbia  University  Studies  in  History,  Economics  cud  Public  Law. 
Edited  by  the  Faculty  of  Political  Science.  (New  York,  1891-. 
Several  volumes  a  year,  each  consisting  of  from  one  to  four  mono- 
graphs.   100  vols.  [228  monographs]  to  1921.) 

Proceedings  of  the  Academy  of  Political  Science  in  the  City  of  New  York. 
Columbia  University.     (Bi-monthly,  New  York,  1910-.) 

Studies  in  Sociology,  Economics,  Politics  and  History.  In  Research  Bulle- 
tins of  the  University  of  Iowa.     (Iowa  City,  1899-.    4  vols.  t3  192 1.) 

University  of  Illinois.  Studies  in  the  Social  Sciences.  (Urbana,  1912-. 
8  vols,  to  192 1.) 


American  Periodicals  xxv 

University  of  Wisconsin  Bulletin.    Economics  and  Political  Science  Series . 

(Madison,  1904-1918.    9  vols.)     Continued  in  Studies  in  the  Social 

Sciences  and  History.      (2  nos.  to  1921.) 
University  of  Pennsylvania  Series  in  Political  Economy  and  Public  Law. 

(Philadelphia,  1888-.) 
Harvard  Economic  Studies.    (Boston,  1906-.    22  vols,  to  192 1.) 
Cornell  Studies  in  History  and  Political  Science.    (Ithaca,  1907-.    3  vols. 

to  1921.) 
University  of  California,  Publications  in  Economics.     (Berkeley,  1908-. 

4  vols,  to  1 92 1.) 
University  of  Minnesota  Studies  in  the  Social  Sciences.     (^Minneapolis, 

I9I3~-    5  nos.  to  1921.) 

Economic  articles  of  more  or  less  permanent  interest  are  also 
found  in  the  monthlies  like  the  North  American  Review,  Review 
of  Reviews,  Atlantic  Monthly,  and  in  the  weeklies  like  the  Nation, 
New  Republic,  Outlook,  Independent,  Weekly  Review,  Annalist  a.nd 
Survey.  The  special  publications  devoted  to  particular  economic 
interests  are  too  numerous  to  mention.  Some  of  them  will  be 
found  below  under  Section  VI,  Semi-Official  Publications. 

Greater  Britain 
The  Economii  Journal.      (Quarterl)-,   London,    1890-.)      The   Journal 

of  the  Britiih  Economic  Association,  since  1903  called  The  Royal 

Economic  Society. 
The  Economic  Review.     (Oxford,  1891-1915.)     Published  quarterly  for 

the  Oxford  Universitj'  Branch  of  the  Christian  Social  Union. 
Journal  oj  the  Royal  Statistical  Society.    (Quarterly,  London,  1837-.) 
Economica.    (Three  times  a  year,  London,  192 1-.)    Edited  by  the  London 

School  of  Economics. 
Studies  in  Economics  and  Political  Science.     (London,  1896-.      58  vols. 

to  192 1.)       Edited  by  the  Director  of  the  London  School  of  Eco- 
nomics and  Political  Science. 
Bulletin  of  the  Department  of  History  and  Political  and  Economic  Science 

in  Queen's  University  (Kingston,  Ontario,  Canada.    38  nos.  to  1921.) 

The  monthly  reviews  like  the  Contemporary,  Fortnightly, 
National,  Nineteenth  Century,  Independent:  and  the  British  Quar- 
terly Review  the  Political  Quarterly,  the  Round  Table  and  the 
Edinburgh  Review  generally  contain  some  articles  of  economic 
interest.  The  most  important  weeklies  devoted  to  current 
economic  topics  are  The  Economist,  The  Statist  and  Common  Sense. 


xxvi  Suggestions 

Germany 
Jarbiicher  fur  Nationaldkonomie  und  Stalistik.      (Monthly,  Jena,  1863-. 

Editec^  by  Conrad  until  1916,  thereafter  by  Elster. 
Jahrbuch  filr  Gesetzgehung,   Verwaltung  tind    Volkswirtkschaft.      (Quar 

terly,  Leipsic,  1 877-.)    Edited  by  Schmoller  to  1918,  then  by  Schu 

macher  and  Spiethoff. 

Zeitschrift  fur  die  gesamle  Staatswissenschaft.  (Quarterly,  Tubingen, 
1 844-.)     Edited  by  Biicher. 

Archiv  fur  Sociale  Gesetzgehung  und  Statistik.  (Quarterly,  Berlin,  1888- 
1903.)     Edited  by  Braun.     Continued  as: 

Archiv  fur  Sozialwissenschafl  und  SodalpolUik.  (Quarterly,  Tubingen, 
1904-.)     Edited  by  Sombart,  Weber  and  Jaffe. 

Annalen  fiir  Soziale  Politik  und  Gesetzgehung.  (Bi-monthly.  Berlin. 
191 2-.)     Edited    by    Braun. 

Zeitschrift  filr  Sozialwissenschafl.  (Quarterly,  Berlin,  1898-.)  Edited 
by  Wolf,  and  since  19 10  by  Pohle. 

Vierteljahrschrift  fur  Sozial-  und  Wirthschaftsgeschichle.  (Quarterly, 
1904-.)     Edited  by  Bauer,  Below,  Hartmann  and  Kaser. 

Annalen  des  deutschen  Reichs  filr  Gesetzgehung,  Verwallung  und  Volks- 
wirthschafl.  (Monthly,  Munich,  1868-.)  Edited  by  Eheberg  and 
Dyraff. 

Finanz-Archiv.    (Quarterly,  Stuttgart,  1884-.)    Edited  by  Schanz. 

Archiv  fiir  Eisenbahnwesen.  (Monthly,  Berlin,  1875-.)  Edited  by  von 
der  Leyen. 

Thiinen  Archiv  contined  in  19 12  as  Archiv  fiir  die  exakte  Wirlkschafts- 
forschung.     (Jena,  1905-.)     Edited  by  Ehrenberg. 

Die  Neue  Zeit.     (Monthly,   Stuttgart,    1883-.)     Edited   by   Kautsky. 

Archiv  fiir  die  Geschichte  des  Sozialisnius  und  der  Arbeiterbewegung. 
(Quarterly,  Leipsic,  1910-.)     Edited  by  Griinberg. 

Marx  Studien.     (Vienna,  1905-.)     Edited  by  Adler  and  Hilferding. 

Publications  of  the  Verein  fiir  Sozial  politik.  (Several  volumes  a  year, 
Leipsic,  1873-.) 

Staats-  und  sozialwissenschaftUche  Forschungen.  (Leipsic,  1878-.) 
Edited  by  Schmoller  [and  since  1905  by  Sering]. 

Sammlung    nationalokonomischcr    u)id    slalistischer    Abhaiuilungen    des 


U 


Foreign  Periodicals  xxvii 

staatswissenschaftlichen  Seminars  zii  Halle.     (Jena,  1877-.)     Edited 
by  Conrad. 

liinchener  volkswirthschaftliche  Studien.     (Stuttgart,    1893-.)      Edited 
by  Brentano  and  Lotz. 

ibhandlimgen  des  staatswissenschaftlichen  Seminars  zii  Jena.  (Jena, 
1900-.)    Edited  by  Pierstorff. 

ibhandlimgen  aiis  dem  staatswissenschaftlichen  Seminar  von  Strassburg. 
(Strassburg,  1893-1918,  34  nos.)    Edited  by  Knapp. 

Kolner  Studien  ziwt  Staats-  und  Wirthschaftsleben  (Bonn,  1912-.) 
Edited  by  A.  Weber,  Wygodzinski  and  Stier-Somlo 

Tiibinger  staatsunssenschafiliche  Ahhandlungen.  (Stuttgart,  1902-.) 
Edited  by  Fuchs. 

Heidelberger  volkswirthschaftliche  Ahhandlungen.  (Karlsruhe,  191 1-.) 
Edited  by  Gothein  and  Weber. 

Freiburger  volksivirthschaftliche  Ahhandlungen.  (Karlsruhe,  191 1-.) 
Edited  by  Diehl  and  Schulze-Gavernitz. 

Socialgeschichtliche  Forschungen.  (Weimar,  1896-.)  Edited  by  Bauer 
and  Hartmann. 

Staatswissenschaftliche  Studien.    (Leipsic,  1893-.)    Edited  by  Elster. 

Berner  Beitrage  zur  Geschichte  dcr  Nationalokonomik.  (Bern,  1886-.) 
Edited  by  Oncken. 

France 

Journal  des  Sconomistes.  (Monthly,  Paris,  1843-.)  Edited  until  1909 
by  Molinari  and  thereafter  by  Yves-Guyot. 

[  Revue  d'Sconomie  Politique.    (Monthly,  Paris,  1887-.)    Edited  by  Gide. 

Revue  d'Histoire  t^conomique  et  Sociale.  (Quarterly,  Paris,  1908-.) 
Edited  by  Vouters  and  more  recently  by  Aucuy  and  Picard.  Until 
1913  it  was  known  as  the  Revue  d'Histoire  des  Doctrines  Economiques 
et  Sociales. 

Revue  de  Science  et  de  Legislation  Financiercs.  (Bi-monthly,  V  \x\s,  1903-.) 
Edited  by  Jeze. 

Reforme  Sociale.  (Paris,  18S0-.)  Bulletin  of  the  Societe  d'Economie 
Sociale. 

Bulletin  de  Statistique  et  de  Legislation  comparee.  (Monthly,  Paris, 
1 877-.) 


!ii^i^ 


xxviii  Suggestions 

Annalcs  des  Sciences  Folitiques.    (Bi-monthly,  Paris,  1886-.) 

Journal  de  la  Sociele  de  Statistlque  de  Paris.    (Monthly,  Paris,  1 860-.) 

L'Economiste  Frangais.     (Weekly,  Paris,  1876-.)     Edited  by  P.  Leroy|  1^' 
Beaulieu  until  1914  and  then  by  Pierre  Liesse. 

Bulletin  de  la  Sociele  d'&conomie  Politique.     (Annual,   Paris,   18: 
Succeeding  the  Annalcs  of  the  same  society  published  from  1841 
to  1887. 

Italy 

Giornale  degli  Economisti  e  Rivisla  dl  Slatistica.  (Monthly,  Padova 
1875-1878,  and  again  Bologna  and  Rome,  1886-.)  Edited  by  Pan 
taleoni,  Beneduce  and  Mortara. 

Bulletin  de  I'lnstitut  International  dc  Statistique.      (Biennially,   Rome.j 
1886-.)    Edited  by  Bodio.  | 

Belgium 

Revue  Economique  Internationale.  (Bi-monthly,  Brussels,  1904-1914.) 
Edited  by  Hennebicq. 


Austria 
Zeitschrift  jur    V olkswirthschaft  SocialpolitiJi  und   Verwaltung.     (Quar- 
terly, Vienna,  1892-.)     Edited  by  Philippovich,  v.  Plener  and  v. 
Wieser. 

Wiener  staatswissenschaftliche  Studien.     (Freiburg  '/B.,  1898-.)     Edited 
by  Bernatzik  and  Philippovich. 

Studien  zur  Social-,  Wirthschafts-  und  V erwaltungsgeschichte.     (Vienna, 
1905"-)    Edited  by  Griinberg. 

Holland 
De  Economist.    (Monthly,  The  Hague,  1 852-.)    Edited  by  Bruyn-Kops. 

Denmark 

Nationalockonomisk  Tidsskrift.  (Quarterly,  Copenhagen,  1873-.)  Edited 
by  Jensen. 

India 

Journal  of  the  Indian  Economic  Society.     (Quarterly,  Bombay,  191 8-.) 
Edited  by  Deole. 

Indian  Journal  of  Economics.     (Quarterly,  Calcutta,   1919-.)     Edited 
by  Jevons. 


Dictionaries  xxix 

IV.   Dictionaries  and  Cyclopedias  of  Economics 

*ALGR.A.VE,  R.  H.  Inglis,  ed.  Dictionary  of  Political  Economy.  (3  vols., 
London,  1894-1899,  with  a  supplement,  1908.)  —  An  admirable 
work,  but  not  devoting  special  attention  to  American  conditions. 

Bliss,  William  D.  P.,  ed.    The  Encyclopedia  of  Social  Reform,  including 
'<       Political  Economy,  Political  ScieiKC,  Sociology  and  Statistics.     (New 
York,  1897;   2d  ed.,  1908.)  —  Serviceable. 

.iART,  Albert  Bushnell  and  McLaughlin,  Andrew  C,  eds.  Cyclo- 
pedia of  American  Government.  (New  York,  3  vols.,  1914.)  — De- 
votes considerable  attention  to  economic  topics. 

Z;oNRAD,  Elster,  Lexis  AND  LoENiNG,  eds.  Handworterbiich  der 
Staatswis sense fiaf ten.  (6  vols.,  Jena,  1 890-1 894;  3d  ed.,  8  vols., 
1908-1911;  new  ed.,  1921-.)- — 'The  most  complete  and  elaborate 
cyclopedia  of  economics  in  existence. 

Elster,  LuDwac,  ed.  Worterbiich  der  Volkswirthschaft.  (2  vols.,  Jena, 
1898;   2d  ed.,  1907.)  —  Of  more  importance  to  continental  students. 

ScHONBERG,  GusTAV.  Handbiwh  der  Politischen  Ockonomie.  (3  vols., 
Tubingen,  1882;  4th  ed.,  1896-1898.)  —  Comprises  a  series  of 
thorough  and  valuable  monographs  by  the  leading  .German  speciahsts. 

Staatslcxikon.  Edited  by  the  Gorres  Society.  (Freiburg  "/B.,  1889- 
1897,  5  vols.)  —  From  the  Catholic  point  of  view. 

Stegmann  and  Hugo.  Handbuch  des  Sozialismus.  (Zurich,  1897.)  — 
A  SociaUst  Cyclopedia. 

GuYOT,  Yves  and  Raffalovich,  A.  Dictionnaire  du  Commerce,  de 
V Industrie  et  de  la  Banque.  (2  vols.,  Paris,  1898-1901.)  —  Useful 
for  trade  and  finance. 

'Say,  Leon,  and  Chailley,  Joseph,  eds.  Nouveau  Dictionnaire  d'Econo- 
mie  Politique.  (2  vols.,  Paris,  1891-1892;  2d  ed.,  1900.)  —  Inferior 
to  both  Palgrave  and  Conrad. 


V.   Government  Documents 
A.   Local  and  State  Publications 

A  large  amount  of  material  on  economic  topics  is  published 
by  the  various  American  governments,  —  local,  state  and  na- 
tional.     The    municipal   governments   of    the   chief   American 


XXX  Suggestions 

cities  publish  annually  reports  of  their  various  city  depart 
ments.  Among  them,  of  economic  interest,  are  the  reports 
dealing  with  city  finances,  water,  gas  and  electricity,  charities, 
health,  housing,  transportation  and  the  like,  and  in  a  few  cases 
like  Boston  and  New  York  the  reports  of  the  Departments  ox 
Bureaus  of  Municipal  Statistics.  New  York  City  published 
for  some  years  a  good  Municipal  Year  Book. 

The  state  governments  publish  a  great  variety  of  documents. 
Among  the  most  important  are  the  reports  of  labor  bureaus 
Of  these,  the  best  are  those  of  New  York  and  Massachusetts; 
but  New  Jersey,  Pennsylvania,  Illinois  and  a  few  others  issue 
fairly  good  reports.  The  annual  reports  of  the  New  York  De- 
partment of  Labor  appear  in  three  volumes,  containing  (i)  the 
General  Report  of  the  Commissioner  and  the  Report  of  the  Bureau 
of  Mediation  and  Arbitration,  (2)  the  Report  of  the  Bureau  of 
Labor  Statistics,  and  (3)  the  Report  of  the  Bureau  of  Factory 
Inspection.  Occasionally  special  reports  are  published,  as  on 
Labor  Legislation,  Employers''  Liability,  Welfare  Institutions, 
Old  Age  Pensions,  Minimum  Wage,  etc. 

The  reports  of  the  Massachusetts  Bureau  of  Statistics  of 
Labor  comprise  the  Annual  Report  on  the  Statistics  of  Labor, 
the  Annual  Report  on  the  Statistics  of  Manufactures  and  vari- 
ous Special  Reports. 

Both  New  York  and  Massachusetts  also  publish  periodical 
bulletins,  the  Labor  Bulletin  of  Massachusetts  appearing  every 
two  months,  the  Department  of  Labor  Bulletin  of  New  York  ap- 
pearing quarterly.  The  reports  of  the  other  states  are  not  so 
valuable  or  voluminous,  but  often  contain  matter  of  importance. 
An  Analysis  and  Index  of  all  Reports  issued  by  State  Bureaus 
of  Labor  Statistics  was  published  by  the  National  Department  of 
Labor  in  1893,  and  has  since  then  been  brought  down  to  date 
from  time  to  time.  The  separate  states  publish  in  turn  the 
annual  proceeding  of  the  National  Convention  of  Chiefs  and  Com- 
missioners of  the  various  Bureaus  of  Statistics  of  Labor  in  the 
United  States,  as  well  as  of  the  International  Association  of 
Factory  Inspectors  of  North  America. 

The  state  governments  also  publish  regularly  the  State 
Treasurers^  and  Comptrollers'  Reports,  Reports  of  Railroad  or 


State  Documents  xxxi 

Fiiblic  Service  or  Public  Utilily  Commissions,  Reports  of  Bank 
and  Insurance  Examiners,  Reports  on  Taxiilion,  Reports  of 
Inspectors  of  Food  and  Animals,  Reports  of  Boards  of  Charities 
and  Correction,  Reports  on  Prison  Labor,  Reports  on  Mining 
Statistics,  Reports  of  State  Agricultural  Experiment  Stations, 
Reports  of  the  Boards  of  Health,  Reports  of  the  Land  or  Public 
Domain  Commissions,  Reports  of  the  Industrial  Accident  or 
Workmen's  Compensation  Commissions  or  Boards,  Reports  of 
the  Minimum  Wage  or  Industrial  Welfare  Commissions  or 
Boards  and  the  hke.  A  few  also  pubUsh  at  regular  intervals  a 
State  Census:  the  best  is  that  of  Massachusetts. 

Some  of  the  states  publish  occasional  reports  of  legislative 
or  special  committees.  Of  these  the  most  common  are  the 
Reports  on  Taxation.  A  list  of  these  will  be  found  in  the  chapter 
on  "Recent  State  Reports  on  Taxation"  in  Essays  in  Taxation  by 
the  author  of  this  volume.  Deserving  of  mention  on  other  topics 
are  the  Massachusetts  Reports  on  The  Unemployed  (1895); 
Street  Railway  Companies  (1901  and  191 8);  Corporation  Laws 
(1903);  Old  Age  Pensions  (1910);  Minimum  Wage  Boards  (191 1); 
and  the  New  York  Reports  on  Tenement  Houses  (1894  and  1901); 
Trusts  (1897);  Canals  (2  vols.,  1899);  Insurance  (8  vols.,  1905- 
1906);  Stock  and  Produce  Exchanges  (1909);  Employers'  Liability 
and  Unemployment  (1910-1912);  Factory  Investigating  Commis- 
sion (4  vols.,  1913-1915);  the  New  Jersey  Report  on  Pension 
Funds  (1918);  the  Minnesota  Report  on  Employes''  Compensation 
(191 1);  and  the  Ohio  Report  on  Health  and  Old  Age  Insurance 
(1919). 

Until  recently  the  only  general  periodical  guides  to  the  legisla- 
tion discussed  in  these  reports  were  the  Annual  Comparative 
Summary  and  Index  of  State  Legislation  and  the  Annual  Review 
of  Legislation,  both  published  by  the  New  York  State  Library. 
These  were  discontinued  in  191 2.  Since  1910  the  Division  of 
Docimaents  of  the  Library  of  Congress  publishes  a  Monthly 
List  of  State  Publications.  A  joint  committee  of  State  Li- 
brarians and  American  Law  Librarians  publish  annually  an 
Official  Index  to  State  Legislation.  A  quarterly  survey  of  govern- 
ment reports  will  be  found  in  the  American  Economic  Review.  For 
the  earlier  reports  we  may  mention: 


xxxii  Suggestions 

BowKER,  R.  K.  Skilc  Publicalions.  A  Provisional  List  of  Ike  OJJicial 
Pitblications  of  the  several  Stairs  of  the  United  States  from  their  Or- 
ganization.   3  vols.,  New  York,  1905. 

Highly  to  be  recommended  is: 

Hasse,  Adelaide  R.  Index  of  Economic  Material  in  the  Documents  of 
the  States  of  the  United  Stales.  Prepared  for  the  Department  of  Eco- 
nomics and  Sociology  of  the  Carnegie  Institute  of  Washington.  A 
separate  volume,  ranging  from  66  to  1136  pages  for  each  state. 
Twelve  states  completed  to  1918,  and  then  discontinued.  (Maine, 
New  Hampshire,  Vermont,  Massachusetts,  Rhode  Island,  New  York, 
California,  Illinois,  Kentucky,  Delaware,  Ohio  and  New  Jersey.) 

The  Legislative  Reference  Department  of  tne  Wisconsin  Free 
Library  Commission  published  for  some  years  after  1905  a 
number  of  valuable  Comparative  Legislative  Bulletins  containing 
judicial  decisions  as  well  as  the  legislation  of  the  chief  foreign 
countries  and  the  American  commonwealths  on  various  economic 
questions.  The  practice  is  now  followed  in  a  considerable  number 
of  other  states. 

B.   National  Departmental  Publications 

The  publications  of  the  national  government  are  of  three 
kinds:  departmental  issues,  commission  or  board  publications, 
and  reports  of  congressional  committees. 

The  Department  of  Commerce  now  publishes  the  largest 
mass  of  material  of  interest  to  students  of  economics.  As  origi- 
nally organized  in  1903,  in  addition  to  numerous  new  duties,  it 
took  ovei  much  work  previously  devolving  upon  other  depart- 
ments. For  details  as  to  the  present  organization  see  the  pub- 
lication: Department  of  Commerce,  Condensed  History,  Duties, 
and  Practical  Operation  of  the  Department  and  its  Several  Bureaus 
and  Offices,  together  with  Laws  relating  specifically  thereto  (1913). 
Cf.  the  List  of  Publications  of  the  Department  of  Commerce  avail- 
able for  Distribution.    19th  ed.,  1921. 

The  Department  publishes  annually  the  Report  oj  the  Secre- 
tary. The  other  publications  are  issued  by  the  separate  bureaus 
or  divisions  as  follows: 

I.  The  Bureau  of  the  Census.  The  Census  is  published 
every  ten  years.    The  most  recent  issues  are  The  Twelfth  Census 


National    Publications  xxxiii 


(1900,  in  16  vols.),  Jlie  Thirteoith  Census  (1910),  in  11  vols.. 
The  Fourteenth  Census  (1920).  The  permanent  Census  Bureau 
publishes  in  addition  to  the  annual  Report  of  the  Director,  a  large 
inumber  of  Bulletins  (about  150  up  to  1919)  and  Special  (Jnter- 
censal)  Reports.    These  are  of  six  classes: 

A.  Decennial:  Manufactures  (191 5);  Agriculture  (191 5); 
Defective,  Dependent,  and  Delinquent  Classes;  Climate;  Social 
Statistics  of  Cities;  Wealth,  Debt  and  Taxation  (1914);  Religious 
Bodies;  Transportation  by  Water;  Express  Companies;  Savings 
Banks;  Mortgage,  Loan  and  Similar  Institutions;  Fishery 
Industry. 

B.  Quinquennial:  Street  Railways;  Electric  Light  and  Power 
Stations;   Telephone  and  Telegraph  Business. 

C.  Biennial:  The  Official  Register  of  the  U.  S.  (2  vols.),  trans- 
ferred in  1907  from  the  Department  of  the  Interior. 

D.  Annual:  Mortality  Statistics;  Birth  Statistics;  Financial 
Statistics  of  Cities;  Production  and  Distribution  of  Cotton;  Forest 
Products;  Quantity  of  Leaf  Tobacco  on  Hand. 

E.  Monthly:    Cotton  Production  and  Consumption. 

F.  Occasional:  Such  a.s  Mines  and  Quarries  (1905);  Women 
at  Work  (1907);   Marriage  and  Divorce  (2  vols.  1908-9). 

The  Census  Bureau  has  also  published  the  Philippine  Census 
(4  vols.  1905);  the  Cuban  Census  (1908);  and  the  Proceedings 
of  the  Conference  of  Governors  on  the  Conservation  of  Natural 
Resources  (1909).  It  has  reprinted  in  part  The  First  Census 
of  1790.  In  1914  it  issued  a  Circular  of  Information  concerning 
Census  Publications. 

2.  The  Bureau  of  Foreign  and  Domestic  Commerce  pub- 
lishes in  addition  to  the  annual  Report  of  the  Chief  a  variety  of 
reports  under  separate  headings.  • 

The  Editorial  Division  (formerly  called  the  Division  of  Con- 
sular Reports)  publishes  information  derived  through  the  con- 
sular offices  and  transmitted  to  the  Department  of  Commerce 
from  the  Department  of  State  through  the  Bureau  of  Trade 
Relations.  These  reports  were  issued  up  to  1903  by  the  Bureau 
of  Foreign  Commerce  of  the  State  Department,  from  1903- 
1905  by  the  Bureau  of  Statistics,  and  from  1906  to  191 2  by  the 
Bureau  of   Manufactures.     They  now   comprise:     (a)   a   daily 


xxxiv  Suggestions 

jouriuil,  known  since  r(}i5  as  Commerce  Reports  wilh  Supple- 
ments consisting  of  the  annual  Consular  Reports;  (b)  mono- 
graphs comprising  the  Special  Agents  Series  (167  numbers  to 
19 1 8),  Special  Consular  Reports  (80  numbers  to  1918),  and 
Miscellaneous  Series  (66  numbers  to  191 8);  (c)  Commercial 
Handbooks  on  foreign  countries,  India,  1915;  Central  America, 
1916;  China  (in  prep.);  ('/)  Confidential  Bulletins  and  circulars 
of  varying  kinds;  (r)  World  Trade  Directory. 

The  Division  of  Foreign  Tariffs  publishes  the  Foreign  Tar  if  Notes 
(18  to  1916)  and  the  Foreign  Tariff  Series  (38  numbers  to  1918). 

The  Division  of  Statistics  publishes  the  following  reports: 
(a)  a  Monthly  Summary  of  Commerce  and  Finance  of  the  U.  S., 
often  containing  monographs  of  special  topics,  among  which 
may  be  mentioned  those  on  Modern  Tariff  Systems  (1904); 
Great  Canals  of  the  World  (1901);  Commercial  Alaska,  1867- 
1903  (1903);  Sugar  Production  and  Consumption  of  the  World 
(1909);  Principal  Transportation  Routes  of  the  World  (1909); 
Trade  of  the  U.  S.  with  other  American  countries  (191 5);  {b)  the 
annual  Report  on  the  Commerce  and  Navigation  of  the  U.  S.,  in 
two  volumes,  also  including  much  detailed  information  on 
internal  commerce  and  general  economic  conditions;  (c)  the 
annual  octavo  Statistical  Abstract  of  the  U.  S.,  a  valuable  con- 
densed compilation;  (d)  occasional  reports  such  as  Statistical 
Abstract  of  Foreign  Countries  (3  parts,  1909)  and  the  Statistical 
Record  of  the  Progress  of  the  United  States,  1800-1912  (1913); 
(e)  the  Monthly  Bulletin  of  Sailing  Dates. 

The  Cost  of  Production  Division  publishes  reports  on  the 
cost  of  production,  such  as  the  Pottery  Industry  (1915);  Women's 
Hosiery  and  Knit  Goods  (^1916),  etc. 

3.  The  Bureau  of  Fisheries  publishes  since  1871  Bulletins 
and  Reports  on  the  Fisheries.  It  discontinued  in  1906  the 
volume  known  as  the  Annual  Report  of  the  Bureau,  with  ap- 
pendices, and  has  since  then  published  the  Annual  Report  of 
the  Commissioner  of  Fisheries  in  the  general  annual  volume 
of  the  Department  of  Commerce  and  Labor,  the  other  special 
reports  appearing  as  separate  Bureau  of  Fisheries  Documents 
under  the  head  of  Fish  Culture,  Aquatic  Biology,  Statistics  of 
the  Commercial  Fisheries,  and  Special  Subjects. 

4.  The  Bureau  of  Navigation  publishes  since   1884  the 


National   Publications  xxxv 

Annual  Report  of  llic  Commissioner,  a  Lisl  of  Merchant  Vessels, 
and  the  monthly  Radio  Service  Bulletin. 

5.  The  Coast  and  Geodetic  Survey  publishes  since  1816 
the  Annual  Report  of  the  Superintendent,  as  well  as  numerous 
charts  and  maps. 

6.  The  Bureau  of  Standards  was  set  off  in  1901  from  the 
Coast  and  Geodetic  Survey,  and  publishes,  in  addition  to  the 
Annual  Report  of  the  Director,  many  circulars  and  bulletins 
relating  to  weights,  measures,  photometry,  thermometry, 
pyrometry,  polarimetry,  radiometry,  and  the  like. 

7.  The  Bureau  of  Light-Houses  publishes  since  1859  a 
bulky  annual  report  and  many  Buoy  and  Light  Lists. 

8.  The  Steamboat-Inspection  Service  pubHshes  since  1852 
the  Annual  Report  of  the  Supervising  Inspector-General. 

All  of  the  above  Bureaus  publish  their  reports  in  the  Annual 
Report  of  the  Secretary  of  Commerce,  which  appear  as  separate  vol- 
umes with  additional  data  in  the  case  of  The  Bureau  of  Navigation, 
The  Bureau  of  Light-Houses  and  The  Steamboat  Inspection  Service. 

The  Department  of  Labor,  set  off  from  the  Department  of 
Commerce  and  Labor  in  1913,  publishes  annually  the  Report  of 
the  Secretary.  The  other  publications  are  issued  by  the  separate 
bureaus  or  divisions  as  follows: 

(i)  The  Bureau  of  Labor  Statistics,  formerly  known  as 
the  Bureau  of  Labor,  publishes  annually  the  Report  of  the  Com- 
missioner of  Labor  Statistics.  From  1886  to  191 1  it  also  pub- 
lished an  annual  report,  and  from  1889  to  1906  it  published  special 
reports.  The  annual  reports  are  as  follows:  (i)  Industrial 
Depressions  (1886);  (2)  Convict  Labor  (1887);  (3)  Strikes  and 
Lockouts  (1888);  (4)  Workingmen  in  Large  Cities  (1889);  (5) 
Railroad  Labor  (1890);  (6)  Cost  of  Production,  Iron,  Steel,  Coal, 
etc.  (1891);  (7)  Cost  of  Production,  Textiles  and  Glass  (2  vols., 
1892);  (8)  Industrial  Education  (1893);  (9)  Building  and  Loan 
Associations  (1894);  (10)  Strikes  and  Lockouts  (2  vols.,  1894); 
(11)  Wages  of  Men,  Women  and  Children  (1897);  (12)  The  Liquor 
Problem  (1898);  (13)  Hand  and  Machine  Labor  (2  vols.,  1899); 
(14)  Water,  Gas  and  Electric  Light  Plants  (1900);  (15)  Wages 
in  Commercial  Countries  (2  vols.,  1900);  (16)  Strikes  and  Lock- 
outs, 1881  to  igoo  (1901);    (17)  Trade  and  Technical  Education 


xxxvi  Suggestions 

( 1 902) ;  ( I  (S)  Cost  of  Living  and  Reta  il  Prices  of  Food,  1903  ( 1 904) ; 
(19)  Wages  and  Hours  of  Labor  (1905);  (20)  Convict  Labor 
(1906);  (21)  Strikes  and  Lockouts,  1901  to  1905  (1907);  (22) 
Labor  Laws  (1908);  (23)  Workingmen's  Insurance  in  the  U.  S. 
(1909);  (24)  Workingmen's  Insurance  and  Compensation  Systems 
in  Europe  (2  vols.,  1911);    (25)  Industrial  Education  (1911). 

The  special  reports  are  as  follows:  (i)  Marriage  and  Divorce 
(1889);  (2)  Labor  Laws  of  some  States  (1892;  2d  ed.,  1896); 
(3)  Analysis  and  Index  of  all  Reports  issued  by  Bureaus  of 
Labor  Statistics  in  the  United  States  (1893);  (4)  Compulsory 
Insurance  in  Germany  (1893);  (5)  The  Gothenburg  System  of 
Liquor  Traffic  (1893);  (6)  The  Phosphate  Industry  of  the  United 
States  (1892);  (7)  The  Slums  of  Baltimore,  Chicago,  New  York 
and  Philadelphia  (1894);  (8)  The  Housing  of  the  Working 
People  (189s);  (9)  The  Italians  in  Chicago  (1897);  (10)  Labor 
Laws  of  the  United  States  (1904);  (11)  Restriction  of  Output 
(1905) ;  (12)  Coal  Mine  Labor  in  Europe  (1906).  The  Bureau  has 
also  published  three  Reports  on  the  Laboring  Classes  in  Hawaii 
(for  1901,  1902,  and  1905);  on  Labor  Disturbances  in  Colorado 
(1905);  and  on  Hours  of  Work  of  Government  Laborers  (1905). 
Since  1905  special  reports  have  been  published  as  Senate  docu- 
ments: 60th  Cong.,  2d  Sess.,  Telegraph  Cos.  (no.  725);  6ist 
Cong.,  2d  Sess.,  Pension  Funds  (no.  427);  Bethlehem  Steel  Strike 
(no.  521);  Telephone  Cos.  (no.  380);  Women  and  Child  Wage 
Earners  (no.  645);  Fourth  Report  on  Hawaii  (no.  866);  62d 
Cong.,  2d  Sess.,  Wages  and  Hours  of  Labor  (no.  301);  63d 
Cong.,  2d  Sess.,  Federal  and  State  Laws  relating  to  Convict 
Labor  (no.  494). 

The  Bureau  has  published  a  bi-monthly  Bulletin  of  the  Bureau 
of  Labor,  with  valuable  original  articles,  a  survey  of  foreign 
statistical  labor  publications,  the  decisions  of  the  courts  affecting 
labor,  and  all  new  labor  laws  of  the  separate  states. 

Since  191 2  the  Bulletins  have  been  published  at  irregular 
intervals  in  ten  series:  (i)  Wholesale  Prices;  (2)  Retail  Prices 
and  Cost  of  Living;  (3)  Wages  and  Hours  of  Labor;  (4)  Women 
in  Industry;  (5)  Workingmen's  Insurance  and  Compensation; 
(6)  Industrial  Accidents  and  Hygiene;  (7)  Conciliation  and  Ar- 
bitration; (8)  Labor  Laws  of  the  United  States;  (9)  Foreign  Labor 


National  Publications  xxxvii 

Laws;  (lo)  Miscellaneous  Series.  These  bulletins  are  numbered 
consecutively,  both  in  each  series  and  as  a  whole,  beginning  with 
no.  loi.     Since  191 5  the  Bureau  also  publishes  a  Monthly  Review. 

(2)  The  Bureau  of  Immigration  publishes  since  1892  the 
annual  Report  of  the  Commissioner  General  of  Immigration. 
Within  this  bureau  is  the  Division  of  Information  which  pub- 
lished the  annual  Report  of  the  Chief  and  also  occasional  Bulletins. 

(3)  The  Bureau  of  Naturalization,  set  off  in  191 2  from  the 
Bureau  of  Immigration  and  Naturalization,  publishes  annually 
the  Report  of  the  Commissioner  of  Naturalization. 

(4)  The  Children's  Bureau,  estabhshed  in  191 2,  publishes 
annually  the  Report  of  the  Chief  and  Bulletins  in  separate  series 
dealing  respectively  with  The  Care  of  Children,  Infant  Mortality, 
The  Federal  Status  of  Children,  Child  Labor  Laws,  etc. 

The  Treasury  Department  issues  the  Annual  Report  of 
the  Secretary  of  the  Treasury,  which  contains  a  survey  of  the 
Finances,  and  includes  the  Reports  of  the  Treasurer,  the  Register 
of  the  Treasury,  the  Director  of  the  Bureau  of  Engraving  and 
Printing,  the  Surgeon  General,  the  Supervising  Architect,  the 
Superintendent  of  the  Life-Saving  Service,  the  Director  of  the 
Mint,  the  Comptroller  of  the  Currency,  and  the  Commissioner 
of  Internal  Revenue.  These  reports  are  also  published  separately, 
the  last  three  in  enlarged  form  and  with  voluminous  tables. 

Among  the  numerous  additional  publications  are  the  follow- 
ing: Division  of  Printing:  Treasury  Decisions  (weekly  and 
annual);  Division  of  Bookkeeping:  Estimates  of  Appro- 
priations (annual);  Division  of  Customs:  Customs  Deci- 
sions (annual).  Conference  of  Local  Appraisers  (annual)  and 
Appeals  Pending  (quarterly);  Comptroller  of  the  Cur- 
rency: Abstracts  of  Reports  of  National  Banks  and  Digest  of 
Decisions;  Bureau  of  the  Mint:  Report  upon  Production 
of  Precious  Metals  (annual) ;  Commissioner  of  Internal  Rev- 
enue: The  Gangers^  Manual  and  Digest  of  Decisions;  Comp- 
troller OF  THE  Treasury:  Decisions  (quarterly  and  annual); 
Division  of  Loans  and  Currency:  Circulation  Statement 
(monthly),  Value  of  Foreign  Co/n5  (quarterly);  Public  Health 
Service:  Public  Health  Reports  (weekly  and  annual).  Public 
Health  Bulletins.     Numerous  monthly,  weekly  and  daily  State- 


xxxviii  Suggestions 

went  Sheets  are  also  issued  on  the  finances.  A  useful  compila- 
tion is  the  Laws  of  the  United  States  concerning  Money,  Bankmg 
and  Loans.  By  Huntington  and  Mawhinney.  Washington, 
191 1  (with  reissues  from  time  to  time).  The  Federal  Farm 
Loan  Bureau,  created  in  1916,  issues  numerous  reports  and 
circulars  through  the  Federal  Farm  Loan  Board. 

The  Department  of  Agriculture  publishes  the  annual  Re- 
port of  the  Secretary,  the  Yearbook  of  the  Department,  and  many 
documents  issued  by  the  various  bureaus.  Of  these  the  most 
important  are  the  Bureau  of  Animal  History;  the  Bureau  of 
Plant  Industry,  with  separate  divisions  publishing  Vegetable 
Pathology  and  Physiology  Bulletins,  Botany  Bulletins,  Agrostology 
Bulletins,  and  Pomology  Bulletins;  the  Forest  Service;  the 
Bureau  of  Chemistry;  the  Bureau  of  Soils;  the  Bureau 
OF  Entomology;  the  Bureau  of  Biological  Survey;  the 
Bureau  of  Crop  Estimates;  the  Bureau  of  Markets,  which 
publishes  daily,  weekly  and  monthly  Market  Reports,  daily  and 
weekly  Marketgrams,  and  a  weekly  Market  Reporter;  the  States 
Relations  Service  (prior  to  1916  termed  the  Office  of 
Experiment  Stations)  ,  which  publishes  the  monthly  Experiment 
Station  Record  and  Agricultural  College  Bulletins;  the  Office  of 
Farm  Management;  the  Office  of  Public  Roads  and  Rural 
Engineering;  and  the  Weather  Bureau,  which  publishes  a 
daily  Map,  a  weekly  National  Weather  and  Crop  Bulletin,  and  a 
monthly  Weather  Review.  Several  of  the  above  Bureaus  publish 
separate  annual  reports.  Numerous  reports  are  issued  for  the 
Bureau  of  Statistics  by:  (a)  the  Division  of  Domestic 
Crop  Reports  (which  publishes  the  monthly  Crop  Report),  (b) 
the  Division  of  Production  and  Distribution  which  up  to 
1903  was  known  as  the  Division  of  Foreign  Markets  and  (c) 
the  Editorial  Division,  which  publishes  statistics  on  rural 
economics.  These  reports  take  the  form  of  Bulletins,  Circulars, 
and  Reprints  from  the  Yearbook.  The  Department  also  publishes 
the  Proceedings  of  the  Annual  Meeting  of  the  American  Associa- 
tion of  Farmers'  Institute  Workers,  and  many  Special  Reports, 
some  of  the  most  important  of  recent  years  being  the  Geography 
of  the  World's  Agriculture  by  Finch  and  Baker  (1917),  and 
Co-operative  Credit  A  ssociations  A  broad.    In  1912  there  were  issued 


National   Publications  xxxix 

under  the  heads  of  Reports,  Bulletins,  Cirailars,  and  Separates, 
2 no  pubHcations  in  over  thirty-four  million  copies,  about  one- 
third  of  them  being  Farmers'  Bulletins.  The  Division  of  Publica- 
tions publishes  a  Monthly  List  of  Publications,  which  forms  a  con- 
venient bibliography  of  the  Department  issues.  Bulletin  no.  6 
contains  a  bibliography  of  the  Department  from  1840  to  1901. 
Circular  no.  150(1921)  contains  a  list  of  all  the  publications  of  the 
Bureau  of  Crop  Estimates,  1863-1920.  An  index  to  the  Farmers^ 
Bulletins,  nos.  i-iooo,  by  C.  H.  Greatham,  appeared  in  1920. 

Since  1916  the  Series  of  Publications  have  been  reduced  to 
six:  (i)  Departmental  Bulletins,  containing  the  popular  results  of 
investigation;  (2)  Periodical  Publications,  including  the  Journal 
of  Agricultural  Research,  Experiment  Station  Record,  Monthly  Crop 
Report,  Market  Reports  and  Marketgrams;  and  Weekly  News 
Letter,  (3)  Farmers'  Bulletins;  (4)  Administrative  Circulars; 
(5)  Separates  and  Unnumbered  Pamphlets,  including  reprints; 
and  (6)  Annual  Reports  and  other  congressional  publications, 
including  the  Year  Book  and  the  Soil  Surveys. 

The  Department  of  the  Interior  publishes  annually  the 
Report  of  the  Secretary,  containing,  in  addition  to  condensed 
reports  of  the  Bureaus,  reports  of  the  Territories,  the  Ter- 
ritorial Possessions,  the  National  Parks  and  the  Elee- 
mosynary Institutions.  The  Bureaus  which  issue  separate 
annual  reports  and  other  publications  are  the  General  Land 
Office  (with  Decisions  in  Land  Cases),  the  Indian  Office, 
the  Bureau  of  Pensiofs,  the  Patent  Office  (with  the  Patent 
Office  Gazette,  Decisions  in  Patent  Cases  and  Indexes  to  Patents), 
the  Bureau  of  Education  (with  many  Separates,  Circulars 
and  Bulletins,  Bulletin  no.  385  containing  a  bibhography  from 
1867  to  1907),  the  Bureau  of  Mines  (with  Bulletins,  Technical 
Papers  and  Miners'  Circulars),  the  Geological  Survey  (with 
Bulletins,  Monographs,  Professional  Papers  and  a  separate 
report  in  two  volumes  on  the  Mineral  Resources  of  the  United 
States)  and  the  Reclamation  Service  (in  several  volumes). 

The  Interstate  Commerce  Commission  publishes  since 
1887  annually  the  Report  of  the  Commission  and  the  Report  on 
the  Statistics  of  Railways  in  the  United  States.    The  Bureau  of 


xl  Suggestions 

Statistics  and  Accounts  publishes  since  1909  the  Monthly 
(and  Annual)  Bulletin  of  Revenues  and  Expenses  of  Steam  Roads, 
since  191 2  the  Accotmting  Bulletins,  since  191 1  the  annual  Report 
on  the  Statistics  of  Express  Companies,  since  1914  the  Reports  on 
Valuation  and  since  1920  the  Reports  of  the  Railway  Labor 
Board.  The  cases  themselves  are  published  as  Decisions  of  the 
Interstate  Commerce  Commission.  The  Commission  also  issues 
annually  the  Proceedings  of  the  Annual  Convention  of  the  National 
Association  of  Railway  Commissioners.  It  published  in  1903 
a  five-volume  work,  entitled  Railways  in  the  United  States  in 
1902.  Since  1908  it  issues  Special  Reports,  of  which  the  first 
was  Intercorporate  Relations  of  Railways. 

The  Tariff  Board,  abolished  in  191 2,  published  reports  on 
Pulp  and  News-Print  Paper  (1911),  on  Wool  (4  vols.,  1912),  and 
on  Cotton  Manufactures  (2  vols.,  191 2). 

The  Tariff  Commission,  created  in  1917,  pubUshes  an  annual 
Report;  a  Tariff  Information  Scries  (22  nos.  to  1 921;;  a  Miscellaneom 
Series  (8  nos.  to  1921);  and  a  series  of  reports  for  the  Ways  and 
Means  Committee. 

The  Post-Office  Department  publishes  an  annual  Report. 

The  War  Department  deals  with  economic  topics  through  the 
Bureau  of  Insular  Affairs.  The  chief  of  the  Bureau  issues 
his  Annual  Report  (including  the  Report  of  the  Philippine  Com- 
mission in  several  volumes  and  the  Report  of  the  Governor  of 
Porto  Rico)  and  a  great  variety  of  other  documents.  The  De- 
partment also  issues  the  annual  Report  of  the  Governor  of  the 
Panama  Canal,  and  the  Panama  Record. 

The  Smithsonian  Institute  pubhshes  many  annual  reports, 
of  which  the  one  of  chJef  interest  to  economists  is  the  Report  of 
the  Bureau  of  Ethnology  in  one  or  more  sumptuous  quarto  volumes. 

The  Federal  Reserve  Board,  created  in  1914,  publishes  an 
annual  Report  and  a  valuable  monthly  Bulletin. 

The  Federal  Trade  Commission,  created  in  1914,  publishes 
an  annual  Report.  It  has  succeeded  the  former  Bureau  of  Cor- 
porations which  has  published  special  reports  on  the  Beef  In- 
dustry (1905);  Transportation  of  Petroleum  (1906);  The  Petroleum 
Industry   (2   vols.,    1907);    Cotton    Exchanges   (3   vols.,    1908-9); 


Congressional  Documents  xli 

The  Tobacco  Industry  (3  vols.,  1909-15);  Taxatio)i  of  Corporations 
(6  vols.,  1909-1915);  Special  Report  on  Taxation  (1914);  Trans- 
portation by  Water  in  the  U.  S.  (4  vols.,  1909-12);  The  Steel  In- 
dustry (3  vols.,  1913-14);  Water  Power  Development  in  the  U.  S. 
(191 2);  The  International  Harvester  Co.  (1913).  The  Trade 
Commission  has  published  reports  on  The  Lumber  Industry 
(1915);  Pipe  Line  Transportation  (1916);  Trust  Laws  and  Un- 
fair Competition  (1916);  Co-operation  in  American  Export  Trade 
(1916);  Beet  Sugar  (1917);  Anthracite  and  Bituminous  Coal 
(1917);  Book  and  News-print  Paper  Industry  (1917);  Fertilizer 
Industry  (1917);  Meat  Packing  Industry  (1919)'  Coal  (7  vols., 
1918-1921). 

The  International  Bureau  of  the  American  Republics,  more 
recently  known  as  the  Pan-American  Union,  publishes  since  1891 
an  annual  Report  of  the  Director,  since  1893  ^  monthly  Bulletin 
and  many  Reports. 

The  Board  of  Mediation  and  Conciliation  created  in  1913 
publishes  an  annual  Report. 

The  U.  S.  Employees  Compensation  Commission  created  in 
1916  publishes  an  annual  Report. 

The  U.  S.  Shipping  Board  created  in  191 7  publishes  an  annual 
Report. 

The  Federal  Board  for  Vocational  Education  created  in  191 7 
publishes  an  annual  Report. 

C.    Congressional  Documents 
Among   the   numberless   Congressional   Documents   of   recent 
years  may  be  mentioned  as  of  special  interest  to   the  students 
of  economics: 

Senate  Report  on  the  Strike  of  Textile  Workers  in  Lawrence,  Mass.,  in  1912. 
(1912.) 

House  Report  on  the  Miners'  Strike  in  the  Bituminous  Coal  Field  in 
Westmoreland  Co.,  Pa.,  in  1910-1911.     (191 2.) 

(House)   Committee  on  Ways  and  Means,  Tariff  Hearings,     (g  vols., 
1908-1909.) 

Tarif  Schedules.     Hearings  before  the  Senate  Stib-Commlttee  on  Finance. 
(i9i3') 


xlii  Suggestions 

Railroad  Securities  Commission  Report.     (191 1.) 

The  Immigration  Commission,  Report  on  Immigration.  (42  vols., 
1910-1912.) 

Public  Lands  Commission,  Preliminary  and  Second  Reports.     (1905.) 

Inland  Waterways  Commission,  Preliminary  Report.     (1909.) 

Commission  on  Country  Life,  Preliminary  Report.  (1909.)  This, 
as  well  as  the  two  preceding  Commissions,  was  created  by  the  Execu- 
tive, but  discontinued  by  Congress. 

National  Monetary  Commission,  Reports  on  Banking  and  Currency, 
at  Home  and  Abroad.     (23  volumes,  1910-1912.) 

(House)  Stanley  Committee  Report  on  the  United  States  Steel  Corporation. 
(1911-1913.) 

(Senate)  Pujo  Committee  on  the  Money  Trust  Investigation.     (1913.) 

(Senate)  Investigation  relative  to  Wages  and  Prices  of  Commodities. 
(4  vols.,  191 1.) 

National  Waterways  Commission,  Report.     (Several  vols.,  1909-1912.) 

(Senate)  Report  on  Condition  of  Woman  and  Child  Wage  Earners  in  the 
United  States.     (19  vols.,  1910-1912.) 

President's  Commission  on  Efficiency  and  Economy.  (6  vols.,  191 2- 
1913-) 

Senate  Committee  on  the  Merchant  Marine  and  Fisheries.  Investiga- 
tion of  Shipping  Combinations.     (4  vols.,  1913-1914.) 

(Senate)  Committee,  Report  on  Agricultural  Co-operation  and  on  Rural 
Credit.     (2  vols.,  1913.) 

Senate  Committee  on  Interstate  Commerce.  Report  on  Government 
Control  and  Operation  of  Railroads.  (1918),  and  Report  on  Extension 
of  Tenure  of  Government  Control  of  Railroads.    (3  vols.,  1919.) 

Senate  Committee  on  Commerce.  Report  on  U.  S.  Shipping  Board  Emer- 
gency Fleet  Corporation.    (8  parts,  1919.) 

(Senate)  Select  Committee  on  Reconstruction  and  Production.  (4  vols.,  1920.) 

The  most  valuable  report  of  recent  years  is  the  Report  of  the 
Industrial  Commission  (19  vols. ,  1 900-1 912).    The  list  of  volumes 


Congressional  Documents  xliii 

is  as  follows:  I.  Trusts  and  Industrial  Cotnb motions;  II.  Trust 
and  Corporation  Laws;  III.  Prison  Labor;  IV.  Transportation; 
V.  Labor  Legislation;  \I.  Distribution  of  Farm  Products;  VII. 
Capital  and  Labor  in  Manufactures  and  in  General  Business;  VIII. 
Chicago  Labor  Disputes;  IX.  Transportation;  X.  Agriculture 
and  Agricultural  Labor;  XI.  Agriculture  and  Taxation;  XII. 
Capital  and  Labor  in  the  Mining  Industries;  XIII.  Trusts  and 
Industrial  Combinations;  XIV.  Capital  and  Labor  in  Manufac- 
tures and  General  Business;  XV.  Immigration  and  Education; 
XVI.  Foreign  Labor  Legislation;  XVII.  Labor  Organization, 
Labor  Disputes  and  Arbitrations;  XVIII.  Industrial  Combina- 
tions in  Europe;  XIX.  Final  Report.  For  the  wealth  of  material 
and  the  ability  with  which  the  results  are  presented,  this  huge 
report  is  unique  in  the  annals  of  the  government  publications. 
The  final  volume  gives  an  admirable  survey  of  the  economic 
condition  of  the  United  States. 

The  U.  S.  Commission  on  Industrial  Relations  created  in  IQ14 
published  its  Report  with  Testimony  (11  vols.)  and  its  Final  Re- 
port in  1915  as  weU  as  a  separate  Report  on  the  Colorado  Strike. 

The  American  governments  are  exceedingly  liberal  in  the 
distribution  of  documents.  All  local  and  state  reports  can 
usually  be  had  for  the  asking;  but  as  the  supply  is  limited,  it 
is  weU  not  to  delay.  As  to  the  documents  of  the  national  gov- 
ernment, the  House  and  Senate  publications  can  be  obtained 
by  application  to  one's  Representative  or  Senator;  the  depart- 
mental publications  by  application  to  the  respective  depart- 
ments. There  is  now  also  a  Superintendent  of  Documents,  who 
is  authorized  by  law  to  sell  surplus  documents  in  his  charge  at 
cost  of  printing  from  the  plates.  He  publishes  a  monthly  Price 
List  of  United  States  Public  Documents  for  Sale.  In  a  few  cases, 
however,  documents  are  sold  by  other  parties.  Thus  the  Con- 
gressional Record  is  sold  by  the  Chief  Clerk  of  the  Government 
Printing  Office;  the  Bulletins  and  Handbooks  of  the  American 
Republics  Bureau  are  sold  by  the  Director  of  the  Bureau;  the 
Official  Gazette  of  the  Philippine  Govermnent,  by  the  Editor  in 
Manila;  etc.,  etc.  Several  private  firms  in  Washington  and 
elsewhere  make  a  business  of  supplying  government  documents. 


xliv  Suggestions 


D.    Indexes  to  Government  Periodicals 

PoORE,  Ben  Perley.  A  Dcscriplivc  Catalog  of  the  United  States  Govern- 
ment  Publications,  1774-1881.     (1885.)  — •  Not  entirely  satisfactory. 

Ames  J.  G.  Comprehensive  hidex  of  Publications  of  the  United  States 
Government,  i88r-i8gj.     (New  ed.,  1905.) 

LuNT,  E.  C.  Key  to  the  Publications  of  the  United  States  Census,  1 790- 
1887  (in  American  Statistical  Association  Publications,  new  Series, 
I,  1888).  —  A  carefully  classified  guide. 

Scott,  G.W.,  and  Beaman,  M.  C.  Index  Analysis  of  the  Federal  Statutes, 
together  ivith  a  table  of  Repeals  aiui  Amendments.     (2  vols.,  1908.) 

SwANTON,  W.  J.  Guide  to  U.  S.  Government  Publications.  Bureau  of 
Education  Bulletin,  1918,  no.  2. 

The  Monthly  Catalogue  of  United  States  Public  Documents, 
issued  by  the  Superintendent  of  Documents,  contains  an  annual 
index.     For  lists  and  indexes  of  state  publications,  see  p.  xxxi. 

E.  British  Official  Publications 

In  Great  Britain  the  official  publications  and  reports,  known 
as  Blue  Books,  are  in  some  respects  more  voluminous  than  in 
the  United  States.  The  chief  periodical  report  is  the  decennial 
Census.  That  of  igoi  appeared  in  7  volumes;  the  Census  of  igii 
in  13  volumes.  Most  of  the  annual  ofhcial  reports  fall  under 
the  heads  of  Finance,  Trade  and  Labor. 

Finance.  Among  these,  each  in  a  separate  volume  or  volumes, 
are  the  Finaiwe  Accounts;  Finajicial  Estimates;  Returns  showing  Revenue 
and  Expenditures;  National  Debt  Account;  National  Debt  during  Sixty 
Years;  Consolidated  Fund  Abstract  Accounts;  Commissioners  of  Inland 
Revenue;  Income  Tax  Assessments;  Local  Taxation  Returns,  Mint 
Report;  Rateable  Property  Returns;  Savings  Bank  Returns;  Commis- 
sioners of  H.  M.'s  Customs. 

Trade.  These  reports,  issued  by  the  Statistical  Department  of 
the  Board  of  Trade,  include  the  Statistical  Abstracts  for  the  British 
Empire,  for  the  British  Colonies  and  for  the  United  Kingdom;  Reports 
on  the  Trade  of  the  United  Kingdom  with  Foreign  Countries  and  British 
Possessions;    Statistical   Tables  showing  Progress  of  British  Trade  and 


British  Documents  xlv 

Productions;  Mer$hanl  Shipping  Returns;  Canals  and  Navigation 
Returns;  Navigation  and  Shipping  Statements;  Railway  Accidents; 
Emigration  and  Immigration.  Also  monthly  Trade  attd  Navigation 
Accounts  and  a  Board  of  Trade  Journal.  The  Statistical  Department  of 
the  Board  of  Customs  issues  annually  the  Report  of  the  Commissioner 
of  Customs,  Colonial  Import  Duties  and  Foreign  Import  Duties. 

Labor.  These  reports,  issued  by  the  Labor  Department  of  the 
Board  of  Trade,  include  Abstract  of  Labor  Statistics;  Abstract  of  Foreign 
Labor  Statistics;  Changes  in  Wages  and  Hours  of  Labor,  Conciliation 
(Trade  Disputes)  Act;  Strikes  and  Lockouts;  Trade  Unions;  Directory 
of  Industrial  A  ssociations;  Report  of  Chief  Inspector  of  Factories  and  Work- 
shops; Report  of  the  Chief  Registrar  of  Friendly  Societies;  Co-operative  Con- 
tracts; Industrial  ajui  Provident  Societies;  MinimumW  age  Boards;  National 
Insurance  Commissioners;  also  a  monthly  Board  of  Trade  Labor  Gazette. 

Other  annual  reports  are: 

Agricultural  Returns;  Department  of  Agriculture  and  Technical  In- 
struction in  Ireland;  Registrar  General;  Irish  Land  Commission;  Re- 
ports on  Mines  and  Quarries;  Inspector  of  Sea  and  Salmon  Fisheries; 
Geological  Survey;  Returns  relating  to  Poor  Rales  and  Pauperism;  Rail- 
way and  Canal  Commission;  Street  and  Road  Tramways;  Trade  and 
Finance  of  Foreign  Countries;  Diplomatic  and  Consular  Reports;  Post- 
master-General.   There  is  also  a  Statistical  A  bslraci  for  British  India . 

Among  the  recent  special  Reports  of  departments  and  Parlia- 
mentary committees  and  commissions  the  most  important  are: 

Royal  Commission  on  Agricidlure  (4  vols.,  1896),  and  Reports  of 
Assistant  Commissioners  (20  vols.,  i8g6);  The  Sweating  System  (8  vols., 
1889);  Labor  (27  vols.,  1894);  Local  Taxation  (9  vols.,  1902);  Financial 
Relations  between  Great  Britain  and  Ireland  (2  vols.,  1896);  Standard 
Piece  and  Time  Rates  (1893  and  1900);  Wholesale  and  Retail  Prices 
(1903);  Employment  of  Women  (1894,  1898,  1899);  The  Unemployzd 
(1893  and  1904);  Tar ij'  Commission  (8  vols.,  1904-1910);  Eight  Hours 
Day  in  the  Coal  Mines  (3  vols.,  1906);  Income  Ta.x  (1906);  Poor  Laws 
(3  vols.,  1909);  Cost  of  Living  (5  vols.,  1907-1912);  Local  Taxation 
(2  vols.,  1912-1914);  Natural  Resources,  Trade  and  Legislation  of  Certain 
Portions  of  H.  M.  Dominions  (18  vols.,  1913-1917);  Administration  of 
Natioml  Heafth  Insurattce  (1917);  and  the  numerous  special  reports 
on  War  Finance  and  War  Legislation  and  Currency  (1914-1919). 

The  most  important  reports  and  i)apcrs  are  summarized  aiid 
criticised  in  an  admirable  quarterly  review  in  each  number  of 


xlvi  Suggestions 

the  Economic  Review.  Messrs.  P.  S.  King  &  Son,  of  London, 
publish  a  convenient  Monthly  List  of  Parliamentary  Papers 
issued  in  the  preceding  month.  There  is  also  a  General  Cata- 
logue of  the  Principal  Parliamentary  Reports  and  Papers  pub- 
lished during  the  Nineteenth  Century  {1801  to  1900),  with  prices, 
and  in  many  cases  with  an  analysis  of  contents. 

For  Australasia  the  best  conspectus  of  the  economic  situation 
may  be  found  in  the  annual  Official  Year  Book  of  Australia 
(no.  13,  1920)  and  the  New  Zealand  Official  Year  Book  (twenty- 
ninth  year,  1920).  The  separate  states  also  publish  good  Year 
Books  or  annual  Statistical  Registers. 

For  Canada  an  excellent  summary  will  be  found  in  the  annual 
Canada  Year  Book  issued  by  the  Census  and  Statistics  Office 
of  Agriculture,  and  covering  the  entire  economic  field. 

For  South  Africa  consult  tne  annual  Official  Year  Book  of  the 
Union  of  South  Africa. 


VI.   Semi-Official  Publications 

The  publications  of  the  American  government  are  supple- 
mented by  a  great  mass  of  documents,  periodicals  and  reports, 
issued  by  private  and  quasi-public  associations.  Local  trade 
statistics  are  found  in  the  Reports  of  the  Chambers  of  Commerce 
of  the  principal  cities.  In  New  York  City  the  Chamber  of 
Commerce  frequently  publishes  valuable  reports  on  economic 
topics  of  state  and  national  significance.  Almost  every  im- 
portant branch  of  business  has  its  own  Trade  Journal,  many 
of  which  are  edited  with  great  ability. 

The  Bulletin  of  the  National  Association  of  Wool  Manufac- 
turers is  published  quarterly  since  1864.  The  Annual  Reports 
of  the  Iron  and  Steel  Association  also  deserve  mention.  In  some 
cases  like  the  Bankers^  Association,  the  Chamber  of  Commerce 
of  the  U.  S.,  the  National  Foreign  Trade  Council,  and  the  Manu- 
facturers' Association  annual  conventions  are  held  and  extended 
reports  issued.  The  publications  of  the  Labor  Organizations 
and  Trades  Unions  are  voluminous.  The  National  Federation 
of  Labor  issues  a  weekly  BidlcTui  and  a  Report  of  the  Annual 
Convention. 

The  annual  reports  of  some  of  the  great  Railway  Systems, 


Bibliographies  xlvii 

Insurance  Companies  and  Industrial  Corporations  can  generally 
be  secured  without  difficulty,  and  afford  interesting  side  lights 
on  economic  development.  Associations  like  the  Free  Trade 
League;  the  Asiatic  Association;  the  Irrigation  Congress;  the 
River  and  Harbor  Congress;  the  Farmers'  Alliance;  the  National 
Child  Labor  Committee;  the  Association  for  Labor  Legislation; 
the  National  Live  Stock  Association;  the  National  Good  Roads 
Association;  the  Patrons  of  Husbandry;  the  National  Dairy 
Association;  the  Stock  Breeders'  Association;  the  Philadelphia 
Commercial  Museum;  the  National  Municipal  League;  the 
Water-Power  Associations;  the  National  Tax  Association;  the 
Association  of  Life  Insurance  Presidents,  and  many  others  of 
more  or  less  permanence,  issue  fugitive,  or  periodical  reports. 
Among  the  most  important  of  such  semi-official  publications 
are  those  of  the  Merchants'  Association,  of  the  Bureau  of  Munici- 
pal Research,  of  the  Russell  Sage  Foundation,  of  the  National 
Civic  Federation,- — all  of  New  York.  Many  important  social 
questions  are  treated  in  the  annual  Proceedings  of  the  National 
Conference  of  Charities  and  Corrections  and  in  the  Reports  of 
the  National  Industrial  Conference  Board.  More  recently 
several  New  York  Banks  have  published  regular  reports  such  as 
the  monthly  Bulletin  and  the  Foreign  Commerce  Series  of  the 
National  City  Bank;  the  Commerce  Monthly  of  the  National 
Bank  of  Commerce;  the  Monthly  Review  of  the  New  York  Federal 
Reserve  Bank;  and  the  Chase  Economic  Bulletin  of  the  Chase 
National     Bank. 

A  valuable  compendium  is   llie  American   Year  Book   (New 
York,  1911-1920). 

VII.  Bibliographies  and  Finding  Lists 
A  series  of  bibhographies,  prepared  by  the  chief  bibliographer 
of  the  Library  of  Congress  (A.  P.  C.  Griffin,  since  1909  H.  H.  B. 
Meyer),  has  been  published  since  1902  by  the  national  govern- 
ment. The  dates  and  subjects  are  as  follows:  Reciprocity, 
(1902);  Industrial  Arbitration,  Government  Ownership  of  Rail- 
roads, Labor,  Colonization,  2d  ed.,  (1903);  Chinese  Immigra- 
tion,  Banks,   Budget,    The   Far  East,   Federal   Control  of  Com- 


xlviii  Suggestions 

Pierce,  2d  ed.,  (1904);  Foreign  Railroads,  Philippines,  (1905); 
Child  Labor,  Municipal  Ownership,  Negro  Questions,  2d  ed., 
Employers'  Liability,  British  Tariff  Movement,  2d  ed.,  Foreign 
Tariffs,  Government  Regulation  of  Insurance,  Mercantile  Ma- 
rine Subsidies,  3d  ed.,  (1906);  Federal  Control  of  Commerce, 
Railroads,  2d  ed.,  Immigration,  3d  ed..  Income  Tax,  Iron  and 
Steel,  Reciprocity  with  Canada,  Trusts,  3d  ed.,  (1907);  Currency 
and  Banking,  Deep  Waterways,  Eight  Hour  Day,  First  and 
Second  United  States  Banks,  Workingmen's  Insurance,  Labor, 
2d  ed..  Postal  Savings  Banks,  (1908);  Valuation  and  Capitali- 
zation of  Railroads,  (1909);  Cost  of  Living,  Reciprocity,  Sugar, 
Inland  Waterways  of  Europe,  (1910);  Boycotts  and  Injunctions, 
Employers'  Liability,  Mercantile  Marine  Subsidies  (additional), 
Parcels  Post,  Reciprocity  with  Canada  (additional),  Taxation  of 
Incomes  (additional),  Wool,  (191 1);  Conservation,  Cost  of  Living 
and  Prices,  (additional)  (191 2);  Monetary  Question,  Federal 
Control  of  Commerce  and  Corporations,  {igi;^);'  Water  Rights, 
Industrial  Arbitration,  new  ed.,  Child  Labor,  new  ed.,  (1914); 
Prison  Labor,  (1915);  Embargoes,  (1917);  European  War  Litera- 
ture, (1918);  Shipping,  Reconstruction,  Dyestuffs  (1919);  Income 
Tax  (1921). 

Since  191 1  the  Librarian  of  Congress  prints  additional  lists 
in  the  Series  known  as  Special  Libraries  in  co-operation  with 
state  libraries  and  state  legislative  reference  departments.  Since 
1918  the  Library  issues  numerous  typewritten  lists,  of  which 
fully  6oS^  deal  with  economic  and  social  questions. 

Other  good  bibliographies  on  special  subjects  are: 

The  Social  Workers'  Guide  to  Social  Publications  of  Representative  Social 
Agencies.  By  E.  M.  Rushmore.  Published  for  the  Russell  Sage 
Foundation.     (New  York,  192 1.) 

Civic  Bibliography  for  Greater  New  York.  Edited  by  James  B.  Reynolds 
for  the  New  York  Research  Council     (191 1.) 

Labor  Bibliography.    Published  by  the  Mass  Bureau  of  Labor  Statistics. 

(1913-) 
Selected  Bibliographies  on  Labor  Subjects.    Published  by  the  American 

Association  of  Labor  Legislation.    (1911-1916.) 
List  of  Publications  pertaining  to  Government  Ownership  of  Railways. 

Publishedby  the  Bureau  of  Railway  Economics.    Washington,  1914. 


Bibliographies  xli 


IX 


The  Boston  Public  Library  has  pubhshed: 


Economics:  Selected  Works  in  the  English  Language  (1904.)  —  Compiled 
by  Ben'j.  Rand. 

The  New  York  Public  Library  publishes  since  191 5  the  weekly 
Municipal  Reference  Library  Notes,  ed.  by  C.  C.  Williamson, 
containing  annotated  bibliographies  on  economic  topics. 

The  London  School  of  Economics  and  Political  Science  also 
issues  occasional  bibliographies  on  selected  topics. 

The  three  most  complete  bibliographies  on  socio-economic 
topics  are  in  German: 

Bernstein,  Edouard.  Bibliographic  des  Sozialismus  und  der  Sozial- 
wissenschaften  in  each  number  of  Dokiimente  des  Sozialismus.  (1901- 
1905.)  —  Annotated  and  valuable. 

Stammhammer,  Josef.  Bibliographic  des  Socialismiis  und  Commu- 
nismus.    (3  vols.,  1893-1909.) 

Stammhammer,  Josef.    Bibliographic  der  Social-Politik.    (1896.) 

The  only  general  bibliography  in  English  is  the  short  work  of 
BowKER,  R.  R.,  and  Iles,  George  S.,  The  Readers^  Guide  in 
Economics,  Social  and  Political  Science.    (1891.) 

A  comprehensive  annual  bibliography  is  published  by  the 
International  Institute  of  Bibhography  under  the  title  Biblio- 
graphia  Economica  Universalis.  It  now  appears  as  a  quarterly 
appendix  to  the  Revue  Economique  Lnternationale. 

The  most  convenient  English  bibliography  of  current  works 
was  until  recently  to  be  found  in  The  Quarterly  Journal  of 
Economics.  This  was  discontinued  in  1908  and  replaced  by 
the  excellent  bibliography  in  the  Economic  Bulletin  of  the 
American  Economic  Association,  continued  since  191 1  in  the 
American  Economic  Review.  The  best  foreign  bibliography  is 
the  Uebersicht  iiber  die  neuesten  Publikationcn  in  Conrad's 
Jahrbilcher  fiir  N ationalokonomie  und  Statistik.  A  combina- 
tion of  bibliography  and  comment  is  found  in  the  Kritische 
Blatter  fiir  die  gesamten  Sozialwissenschaften  (monthly,  Dresden, 
1905-1912).  Edited  by  H.  Beck.  The  periodical  was  composed 
of  critical  reviews  by  an  international  staff,  each  number  serv- 
ing as  an  introduction  to  a  Bibilographie  der  Sozialwissen- 
schaften which  since  1906  was  published  for  the  International 


1  Suggestions 

Institute  of  Social  Bibliography  in  Berlin.  It  was  printed  in 
several  languages,  the  English  edition  having  been  distributed 
for  a  brief  time  as  a  supplement  to  the  Journal  of  Political 
Economy. 


VIII.    List  of  Books  to  -wrhich  Abbreviated  References  are 
made  in  the  Bibliographies  at  the  Heads  of  Chapters 

Ashley,  W.  J.  An  Introduction  to  English  Economic  History  and  Theory. 
(2  vols.,  London,  1888-1893.) 

Ashley,  W.  J.    Surveys,  Historic  and  Economic.    (London,  1900.) 

Bagehot,  Walter.     Economic  Studies.     (London,  1880.) 

Beveridge,  W.  H.  Unemployment.  A  Problem  of  Industry.  (Lon- 
don, 1909.) 

Bohm-Bawerk,  Eugen  von.  The  Positive  Theory  of  Capital.  (Trans. 
by  Smart,  London,  189 1.) 

BowLEY,  Arthur  L.  Elements  of  Statistics.  (London,  1901,  4th  ed., 
1920.) 

BtJCHER,  Carl.  Industrial  Evolution.  (Trans,  from  the  3d  German 
edition  by  S.  Morley  Wickett,  New  York,  1901.) 

Cairnes,  J.  E.  The  Character  and  Logical  Method  of  Political  Economy. 
(London,  1857;  2d  ed.,  1875.) 

Cairnes,  J.  E.  Some  Leading  Principles  of  Political  Economy,  newly 
Expounded.     (London,  1874.) 

Cannan,  Edwin.  A  History  of  the  Theories  of  Production  and  Dis- 
tribution in  English  Political  Economy  from  1776  to  1848.  (London, 
1893;  3d  ed.,  1909.) 

Cannan,  Edwin.  Wealth.  A  Brief  Explanation  of  the  Causes  of  Economic 
Welfare.     (London,  1914.) 

Carver,  Thomas  Nixon.  The  Distribution  of  Wealth.  (New  York, 
1904) 

Carver,  Thomas  Nixon.  Principles  of  Political  Economy.  (New  York, 
1919.) 

Clark,  John  Bates.     The  Distribution  of  Wealth.     (New  York,  1899.) 

Clark,  John  Bates.  Essentials  of  Economic  Theory.  (New  York, 
1907.) 


Select  Books  li 

CoMAN,  Katharine.  The  industrial  History  of  the  United  Stales.  (New 
York,  1905;  new  ed.,  1911.) 

Commons,  J.  R.,  and  Associates.  History  of  Labour  in  the  United  Stales. 
(2  vols.,  New  York,  1918.) 

Cunningham,  W.  An  Essay  on  Western  Civilizalion  in  its  Economic 
Aspects.  Ancient  Times.  (2d  ed.,  London,  1911.)  Mediaeval  and 
Modern  Times.     (2d  ed.,  London,  1910.) 

Cunningham,  W.  The  Growth  of  English  Industry  and  Commerce. 
Early  and  Middle  Ages.  (5th  ed.,  London,  1910.)  Modern  Times. 
(sth  ed.,  2  vols.,  London,  191 2.) 

Davenport,  Herbert  Joseph.  Value  and  Distribution.  (Chicago, 
1907.) 

D.WENPORT,  Herbert  Joseph.  The  Economics  of  Enterprise.  (New 
York,  1913.) 

Dewey,  Davis  R.  Financial  History  of  the  United  States.  (Am.  Citizen 
Series,  New  York,  1903,  7th  ed.,  1920.) 

Ely,  Richard  T.  Studies  in  the  Evolution  of  Industrial  .Society.  (New 
York,  1903.) 

Ely,  Richard  T.  Property  and  Contract  in  their  Relations  to  the  Distri- 
bution of  Wealth.     (New  York,  1914.) 

Fetter,  Frank  A.  The  Principles  of  Economics.  (New  York,  1904 
3d  ed.,  1913.)  Economic  Principles  (1915);  Modern  Economic 
Problems  (19 16). 

Fisher,  Irving.  The  Nature  of  Capital  and  Income.  (New  York, 
1906.) 

Fisher,  Irving.     The  Rate  of  Interest.     (New  York,  1907.) 

Fisher,  Irving.     The  Purchasing  Power  of  Money.     (New  York,  1911.) 

Flux,  A.  W.  Economic  Principles,  an  Introductory  Study.  (London, 
1904.) 

Giffen,  Robert.     Economic  Inquiries  and  Studies.     (London,  1904.) 

Hadley,  Arthur  Twining.  Economics.  An  Account  of  the  Rela- 
tions between  Private  Property  and  Public  Welfare.  (New  York 
1896.) 

Hearn,  William  Edward.  Philology;  or  the  Theory  of  the  Ejforls 
to  Satisfy  Human  Wants.     (London,  1864.) 

HoBSON,  John  A.     The  Economics  of  Distribution.     (New  York,  1900.) 


lii  Suggestions 


HoBSON,  John  A.  The  Evolution  of  Modern  Capitalism.  (London, 
1894,4th  ed.,  1917.) 

HoBSON,  John  A.  Work  and  Wealth.  A  Human  Valuation.  (London, 
1914.) 

Jevons,  W.  Stanley.  Investigations  in  Currency  and  Finance.  (Lon- 
don, 1884.) 

Jevons,  W.  Stanley.    Methods  of  Social  Reform.    (London,  1883.) 

Jevons,  W.  Stanley.  Money  and  the  Mechanism  of  Exchange.  (Lon- 
don, 1879.) 

Jevons,  W.  Stanley.    The  Principles  of  Economics.    (London,  1905.) 

Jevons,  W.  Stanley.  The  Theory  of  Political  Economy.  (London, 
1871;  4th  ed.,  1911.) 

Johnson,  Alvin,  S.  Rent  in  Modern  Economic  Theory.  In  American 
Economic  Association  Publications.  (3d  Series,  Vol.  Ill,  New 
York,  1902.) 

Kelley,  Florence.  Modern  Indtistry  in  Relation  to  the  Family,  Health, 
Education,  Morality.     (New  York,  1914.) 

Keynes,  J.  The  Scope  and  Method  of  Political  Economy.  (London, 
1891;  3d  ed.,  1904.) 

Maine,  Henry  Sumner.  Ancient  Law.  (London,  1861;  8th  ed., 
1880.) 

Marshall,  Alfred.  Principles  of  Economics.  (Vol.  I,  London,  1890; 
8th  ed.,  1920.) 

Marshall,  Alfred.     Industry  and  Trade.     (London,   1920.) 

Mayo-Smith,  Richmond.  Science  of  Statistics.  (New  York,  2  parts, 
1895-1899.) 

Mitchell,  Wesley  Clair.  A  History  of  the  Greenbacks.  (Chicago, 
1903-) 

Mitchell,  Wesley  Clair.  Gold,  Prices  and  Wages  under  the  Green- 
back Standard.     (Berkeley,  1908.) 

Mitchell,  Wesley  Clair.     Business  Cycles.     (Berkeley,   1913.) 

Mill,  John  Stuart.  Principles  of  Political  Economy,  with  some  of 
their  Applications  to  Social  Philosophy.  (2  vols.,  London,  1848; 
5th  ed.,  1880.) 


Select  Books  liii 

Moore,  Henry  Ludwei,l.     Laivs  of  Wages.     (New  York,  191 1.) 

Nicholson,  J.  Shield.  Principles  of  Political  Economy.  (3  vols., 
London,  1893-1901.) 

Nicholson,  J.  Shield.  The  Effects  of  Machinery  on  Wages.  (New  ed., 
London,  1892.) 

Pantaleoni,  M.'VFFEO.     Pure  Economics.     (Trans,  by  Bruce,  London, 

1898.) 
Patten,  Simon  N.    The  Consumption  of  Wealth.    (Philadelphia,  1889.) 

Patten,  Simon  N.  The  Development  of  English  Thought;  A  Study  in 
the  Economic  Interpretation  of  History.     (New  York,  iSgg.) 

Patten,  Simon  N.  The  Theory  of  Dynamic  Economics.  (Philadelphia, 
1892.) 

Pierson,  N.  G.  Principle  of  Economics.  (Trans,  by  .\.  .\.  Wotzel. 
London,  Vol.  I,  1902;   Vol.  IL,  1912.) 

PiGOU,  A.  C.  Wealth  and  Welfare.     (London,  1912.) 

PiGOU,  A.  C.    Economics  of  Welfare.    (London,  1921.) 

RiCARDO,  David.  Principles  of  Political  Economy  and  Taxation.  (Lon- 
don, 181 7.) 

Rowntree,  B.  L      Poverty.     A  Study  in  Town  Life.     (London,  1901.) 

Seager,  Henry  Rogers.    Principles  of  Economics.    (New  York,  1913.) 

Seager,  Henry  Rogers.  Economics:  Briefer  Course.  (New  York, 
1909.) 

Seligman,  Edwin  R.  A.  The  Economic  Interpretation  of  History.  (New 
York,  1902;  2d  ed.,  1907.) 

Sidgwick,  Henry".  The  Principles  of  Political  Economy.  (London, 
1883.) 

Smart,  William.     The  Distribution  of  Income.    (London,  1899;    2d  ed., 

1912.) 
Smart,  William.     An  Introdjiction  to  the  Theory  of  Value.     (London, 

1891;  3d  ed.,  1914.) 

Smart,  William.     Studies  in  Economics.     (London,  1895.) 

Smith,  Adam.  An  Inquiry  into  the  Nature  and  Causes  of  the  Wealth 
of  Nations.  (2  vols.,  London,  1776.  Recent  editions  by  Edwin 
Cannan,  2  vols.,  London,  1904,  and  in  Everyman^  Library  by  Selig- 
man, 2  vols.,  London  and  New  York,  n.  d.  [1910].) 


liv  Suggestions 

Taussig,  Frank  W.    Principles  of  Economics.   (2  vols.,  New  York,  191 1 ; 

new  ed.,  1917.) 
Veblen,  Thorsten.     The  Theory  of  Business  Enterprise.     (New  York, 

1904.) 
Veblen,  Thorsten.    The  Instinct  of  Workmanship.    (1914.) 
Walker,  Francis  A.    Political  Economy,  Advanced  Course.    (New  York, 

1883;  3d  ed.,  1888.) 
Walker,  Francis  A.     The  Wages  Question;  A  Treatise  on  Wages  and 

the  Wages  Class.    (New  York,  1876.) 
W.\LSH,    Correa   Moylan.      The   Measurement   of   General    Exchange 

Value.    (New  York,  1901.) 
Walsh,   Correa   Moylan.      The  Fundamental   Problem  in   Monetary 

Science.    (New  York,  1903.) 
Webb,  Sidney  and  Beatrice.    The  History  of  Trade  Unionism.    (Lon- 
don, 1894;  new  ed.,  1920.) 

Webb,  Sidney  and  Beatrice.  Industrial  Democracy.  (2  vols.,  Lon- 
don, 1894;   new  ed.,  in  i  vol.,  1907.) 

Webb,  Sidney  and  Beatrice.  Problems  of  Modern  Imhistry.  (London, 
1898;   new  ed.,  1907.) 

Webb,  Sidney  and  Beatrice.  The  Break  up  of  the  Poor  Law.  (London, 
1909.) 

Webb,  Sidney  and  Beatrice.  The  Public  Organisation  of  the  Labour 
Market.     (London,  1909.) 

Webb,  Sidney  and  Beatrice.  The  Prevention  of  Destitution.  (London, 
1911.) 

Weber,  Adna  F.  The  Groivth  of  Cities  in  the  Nineteenth  Century  — 
A  Study  in  Statistics,  in  Columbia  Studies  in  History,  Economics 
and  Public  Law.     (Vol.  XI,  New  York,  1899.) 

White,  Horace.  Money  and  Banking.  (New  York,  1895;  a  new  edi- 
tion every  few  years.) 

Wicksteed,  Philip  H.  The  Common  Sense  of  Political  Economy. 
(London,  19 10.) 

Wieser,  Friedrich  von.  Natural  Value.  (Edited  by  W.  Smart; 
trans,  by  C.  Malloch,  London,  1893.) 


Principles   of  Economics 


Principles   of  Economics 


Part  I 
Introduction 

CHAPTER  I 

FUNDAMENTAL  CONCEPTS 

1.   References 

A.  Marshall,  Principles  of  Economics  (igio),  bk.  ii;  J.  B.  Clark,  Distribu- 
tion of  Wealth  (1899),  ch.  ix,  and  Essentials  of  Economic  Theory  (1907),  ch. 
i;  W.  E.  Hearn,  Plutology  (1864),  ch.  i;  W.  Smart,  Distribution  of  Income 
(1899),  bk.  i;  A.  T.  Hadley,  Economics  (1896),  ch.  i;  F.  A.  Fetter,  Eco- 
nomic Principles  (1915),  parts  I  and  II,  J.  S.  Nicholson,  Principles  of 
Political  Economy  (1903),  Introd.;  H.  Sidwick,  Principles  of  Political 
Economy  (1883),  bk.  i,  ch.  iii;  F.  A.  Walker,  Political  Economy  (3d  ed., 
1888),  part  i;  A.  W.  Flux,  Economic  Principles  (1904),  ch.  i;  E.  Cannan, 
History  of  the  Theories  of  Production  and  Distribution  (2d  ed.,  1904),  ch.  i; 
H.  R.  Seager,  Principles  of  Economics  (1913),  ch.  iv;  M.  Pantaleoni, 
Pure  Economics  (1898),  part  i,  ch.  v;  W.  S.  Jevons,  Principles  of  Econom- 
ics (1905),  chs.  iii,  iv,  viii;  T.  Veblen,  The  Instinct  of  Workmanship  (1914), 
chs.  i,  ii;  I.  Fisher,  Capital  and  Income  (1906). 

2.   Economic  Life 

The  starting-point  of  all  human  activity  is  the  existence  of 
wants.  To  satisfy  hunger  and  thirst,  to  secure  shelter  and  to 
provide  clothing  were  the  chief  aims  of  primitive  man,  and 
constitute  even  to-day  the  motor  forces  of  all  society.  As  man 
develops,  his  wants  grow  in  number  and  refinement.  However 
civilized  he  becomes,  his  material  welfare  forms  the  basis  on 
which  the  whole  larger  life  is  erected.  To  secure  the  means  of 
satisfying  wants  brings  into  play  the  economic  activity  of  man. 

3 


4  Fundamental  Concepts  [§  2 

The  process  may  be  expressed  in  the  words  —  wanls,  efforts, 
satisfactions.  We  start  out  with  the  existence  of  wants,  we 
desire  to  secure  their  satisfaction,  we  can  ordinarily  accomplish 
this  only  through  some  effort.  The  economic  life  of  man  is 
concerned  with  such  efforts  and  their  results. 

The  sum  of  all  one's  possessions,  including  at  the  time 
slaves,  wife  and  children,  was  termed  by  the  Greeks  ecos 
(oiKos);  and  the  method  of  managing  them  was  called  eco- 
nomics {oUopoiJLLKr])  —  the  control  or  rule  {po/jlos)  of  the  house- 
hold (oLKos).  We  still  speak  of  the  economical  man  as  the 
one  who  orders  the  affairs  of  his  household,  who  manages  his 
possessions,  with  prudence  and  success.  In  the  wider  sense, 
whether  he  achieves  success  or  not,  the  economic  activity  of 
man  looks  to  a  provision  of  the  material  means  to  satisfy  his 
wants  and  those  of  his  household.  The  science  which  deals 
with  these  economic  activities  is  called  economics  or  political 
economy. 

Business  means  etymologically  the  state  of  being  busy.  The 
fundamental  thing  about  which  all  men  must  ordinarily  busy 
themselves  is  the  satisfaction  of  their  wants.  To  attain  first 
a  competence  and  then  a  surplus,  to  provide  for  one's  liveli- 
hood and  then  to  secure  a  profit,  is  the  essence  of  business 
activity.  Economics  might  therefore  equally  well  be  defined 
as  the  science  of  business  activities. 

The  motive  that  guides  men  in  their  economic  life  is  some- 
times described  as  the  economic  motive.  It  may  best  be 
defined  as  the  motive  which  impels  every  human  being  to 
satisfy  his  wants  with  the  smallest  possible  effort,  or  which 
leads  him  to  secure  the  most  pleasure  with  the  least  pain.  The 
existence  of  such  a  motive  is  undeniable;  it  is  in  fact  of  deep 
and  abiding  importance;  it  may  even  be  declared  the  para- 
mount consideration  in  the  working  out  of  economic  law. 
We  must,  however,  not  forget  that  this  is  not  the  only  influence 
at  work  in  economic  •  life.  Human  beings  are  impelled  by 
other  motives  as  well;    and  these  other  motives  may  often  exert 


§  2]  Economic  Life  5 

a  perceptible  influence  in  economic  life.  The  study  of  eco- 
nomic history  shows  us  that  religious,  political  and  ethical 
considerations  have  profoundly  modified  economic  action  itself. 
In  the  economic  life  of  a  primitive  Christian  community  the 
economic  motive  was  of  very  different  importance  from  that  of 
modern  industrial  life.  Even  in  modern  times  the  economic 
motive  is  not  equally  strong  everywhere,  or  equally  free  from 
the  admixture  of  other  influences.  The  Indian  ryot  is  not 
like  the  American  farmer  in  his  desire  to  "get  ahead."  The 
negro  laborer  in  the  South  is  not  so  amenable  to  the  economic 
motive  as  the  stock  exchange  broker.  The  salary  of  a  govern- 
ment employee  who  hopes  for  official  decorations  cannot  be 
explained  in  the  same  way  as  the  wages  of  a  carpenter.  An 
analysis  of  all  the  motives  that  influence  men  in  their  economic 
life  belongs  to  social  psychology,  and  would  disclose  widely 
varying  efifects  at  different  times  and  places,  as  well  as  in 
different  individuals  or  classes  at  the  same  time  or  place.  In 
searching  for  the  fundamental  laws  of  economics,  it  is  conven- 
ient to  exclude  all  motives  save  the  economic,  since  the  latter 
is  the  one  of  basic  significance,  and  since  it  would  otherwise  be 
impossible  to  formulate  economic  theory  in  general  terms.  In 
applying  the  law  to  actual  life,  however,  we  must  be  careful  to 
study  how  its  operation  is  modified  by  the  other  —  even  though 
minor  —  motives  which  affect  economic  action. 

If  the  "economic  motive"  is  thus  open  to  misconception 
as  explaining  the  whole  economic  life,  the  so-called  "eco- 
nomic man"  is  a  complete  abstraction.  By  the  "economic 
man"  is  meant  the  human  being  dominated  by  the  economic 
motive.  Such  a  man,  however,  does  not  really  exist.  Not 
only  do  other  motives  affect  the  economic  life,  but  side  by  side 
with  the  economic  life  itself  are  the  aesthetic  life,  the  religious 
life,  the  intellectual  life  and  the  multiplicity  of  other  human 
activities.  It  is  indeed  the  function  of  economics  to  study 
that  aspect  of  human  activity  known  as  the  economic  life. 
We  must,  however,  not  forget  that  we  are  studying  man  in  only 


6  Fundamental  Concepts  [§  3 

one  phase  of  his  existence.  Although  there  is  both  an  eco- 
nomic and  a  religious  life,  there  is  no  economic  man,  just  as 
there  is  no  separable  religious  man.  The  business  man  has  his 
family,  just  as  the.  clergyman  has  an  appetite.  The  conclusions 
of  economic  science,  therefore,  are  provisional,  not  final,  con- 
clusions with  reference  to  the  conduct  of  life  in  general. 

3.  Economics  or  Political  Economy  ? 

Civilized  man  cannot  be  thought  of  apart  from  society.  In 
fact  human  beings,  whether  civilized  or  not,  have  from  the 
outset  lived  in  some  form  of  social  union.  Robinson  Crusoe  is 
not  a  type,  but  an  anomaly.  Without  society  man  could  never 
have  developed.  There  would  be  no  such  thing  as  speech, 
morals,  law  or  order.  Economic  life  deals  with  man  as  exist- 
ing in  society.     Economics  is  hence  a  social  science. 

Economics,  however,  is  not  the  whole  of  social  science. 
There  are  as  many  divisions  of  social  science  as  there  are 
important  classes  of  social  relations.  Jurisprudence  deals  with 
the  legal  relations  of  society,  with  certain  usages  and  customs 
which  have  received  the  sanction  of  precedent  and  have  been 
crystallized  into  law.  Ethics,  or  the  science  of  morals,  deals 
with  another  important  grcup  of  social  relations,  for  individual 
standards  of  conduct  can  be  understood  only  in  their  relation 
to  social  ethics.  Politics  treats  of  the  social  relations  of  man 
looked  upon  as  a  member  of  organized  society  or  the  state; 
it  discusses  the  connection  between  the  individual  and  the 
government.  Sociology,  or  the  fundamental  social  science, 
deals  with  society  as  a  whole,  and  studies  certain  general  prin- 
ciples that  lie  at  the  basis  of  each  of  the  separate  social  sciences. 
Economics  is  one  of  these  separate  social  sciences.  The  ethi- 
cal, the  legal,  the  political  and  the  economic  relations  of  men 
are  all  outgrowths  of  social  life;  and  what  is  common  to  them 
all  falls  within  the  province  of  sociology. 

Why,  then  do  we  speak  of  political  economy?  It  may  be 
frankly   confessed   that    the    term    is   inexact.     In    one   sense 


§  3]  Proper  Term  y 

politics,  as  we  have  seen,  is  simply  a  branch  of  social  science. 
Politics  deals  with  the  state;  but  the  state  is  organized  society. 
It  is  composed  of  individuals  and  cannot  be  conceived  as 
apart  from  individuals.  Yet  when  we  use  the  term  political 
science,  stress  is  ordinarily  laid  on  the  state;  when  we  speak 
of  social  science,  the  emphasis  is  put  on  individuals  as  mem- 
bers of  society.  It  so  happens  that  when  the  term  political 
economy  was  first  used  by  the  Greeks,  they  thought  only  of 
the  "  former  meaning.  Aristotle,  after  discussing  domestic 
economy,  tells  us  that  states  also,  like  individuals,  must  make 
both  ends  meet.  There  is,  he  says,  a  regal  economy,  or  the 
art  of  managing  the  public  household  in  monarchies;  there  is 
a  provincial  economy,  best  suited  to  provinces;  and  finally 
there  is  a  political  economy,  best  suited  to  the  "polis,"  or  free 
state.  Political  economy  therefore  is  to  him  substantially  the 
art  of  providing  a  revenue  for  the  state.  When  the  subject 
was  again  discussed  at  the  close  of  the  middle  ages,  it  was 
seen  that  the  revenue  of  the  state  depends  upon  the  revenue 
of  the  people,  and  political  economy  was  now  conceived  of 
as  the  art  of  making  a  people  wealthy  and  powerful  through 
national  development.  It  was  soon  recognized,  however,  that 
national  progress  depends  chiefly  upon  the  efforts  of  the  indi- 
viduals themselves.  Thus  in  more  recent  times  the  stress 
!has  come  to  be  laid  on  the  causes  which  condition  the  eco- 
inomic  advance  of  the  various  classes  of  society,  and  since  the 
emphasis  is  now  put  on  the  social  rather  than  on  the  political 
causes,  the  science  which  deals  with  these  problems  is  properly 
called  social  economics  or,  more  briefly,  economics. 

The  world,  however,  is  conservative;  and  the  old  term 
political  economy,  which  arose  in  former  centuries  when 
attention  was  centred  on  the  poHtical  side,  is  still  often  used. 
Strictly  speaking,  we  ought  to  employ  the  term  political  econ- 
omy only  when  we  treat  of  the  political  aspect  of  economic 
relations,  that  is,  of  their  direct  dependence  upon  government 
action.     People    forget    that    economic    activity    is    primarily 


8  Fundamental  Concepts  [§  4 

social,  and  only  in  part  influenced  by  political  considerations. 
The  force  of  habit  makes  them  say  political  economy  when 
they  really  mean  social  economics  or  economics  proper. 

The  foregoing  explains  the  reason  for  dropping  the  first 
half  of  the  old  term,  political  economy.  The  change  in  the 
second  half  is  due  to  another  cause,  —  the  recognition  of  the 
scientific  character  of  the  study.  Many  modern  sciences  end 
with  the  suffix  "ics,"  as  physics,  politics  or  mathematics. 
When  the  writers  of  the  seventeenth  and  eighteenth  centuries 
first  adopted  the  Greek  phrase,  they  had  in  mind  the  endeavor 
to  augment  the  wealth  or  "economy"  of  the  state.  Hence  the 
term.  The  transition  from  the  point  of  view  of  an  art  to  that 
of  a  science  has  substituted  for  the  old  phrase  the  newer  name 
—  economics,  that  is,  the  science  that  deals  with  the  economy 
of  society  and  of  the  individuals  of  which  it  is  composed. 

4.   The  Meaning  of  "Wealth 

It  is  evident  from  what  has  been  said  that  economic  activity 
is  concerned  with  wealth.  In  fact  economics  is  often  called 
the  science  of  wealth.     But  what  is  wealth? 

To  the  ordinary  man  wealth  is  equivalent  to  money.  When 
we  look  a  little  deeper,  however,  we  see  that  what  he  means 
is  not  money,  but  money's  worth.  A  man's  wealth  nowa- 
days consists  of  anything  which  can  be  obtained,  or  sold,  for 
money.  But  this  is  only  a  secondary  meaning.  Money  is  an 
institution  of  comparatively  recent  date;  there  was  wealth 
before  there  was  money.  Nor  will  it  suffice  to  say  that  wealth 
is  that  for  which  something  else  can  be  procured  through  ex- 
change. For  although  there  were  exchanges  in  the  shape  of 
barter  before  there  was  any  money,  wealth  existed  even  before 
men  exchanged  their  possessions.  The  fundamental  idea  is 
something  deeper.     There  are  really  four  characteristics. 

(i)  Originally  wealth,  as  the  word  implies,  denoted  weal  or 
well-being.  Whatever  a  man  had  in  abundance  constituted  his 
wealth,  because  it  afforded  him  a  surplus.     It  made  him  well 


§  4]  Meaning  of  Wealth  9 

off.  The  capacity  of  anything  lo  satisfy  a  human  desire  is 
called  its  utility.  When  wc  speak  of  the  utility  of  a  thing, 
however,  we  do  not  pass  any  judgment  upon  its  moral  qualities. 
Whisky  and  opium  may  be  injurious,  yet  so  far  as  they  satisfy 
existing  wants  they  possess  utility.  They  are  called  goods 
because  they  are  good  for  the  satisfaction  of  some  want,  no 
matter  how  reprehensible  that  want  may  be.  In  order  for 
anything  to  constitute  wealth,  the  first  requisite  is  that  it  should 
possess  utility,  that  is,  the  capacity  to  satisfy  some  desire. 

(2)  The  second  characteristic  of  wealth  is  that  it  must  be  ap- 
propriable. The  electricity  in  a  lightning  flash  may  be  poten- 
tially useful,  but  it  cannot  be  appropriated  to  man's  uses. 

(3)  The  third  characteristic  of  wealth  is  that  it  must  be 
something  external  to  man.  Personal  or  internal  good  are  a 
contradiction  in  terms.  What  is  meant  is  personal  or  internal 
qualities  which  are  bound  up  with  the  individual  himself,  like 
his  physical,  mental  or  moral  characteristics.  Health  is  not 
wealth,  although  it  may  be  the  basis  of  wealth.  Man  cannot 
part  with  these  qualities;  he  can  only  embody  them  in  some 
product  which  will  be  serviceable  to  others.  His  personal 
qualities  may  thus  enable  him  to  acquire  wealth,  but  they  do 
not  themselves  constitute  wealth.  To  speak  of  personal  wealth 
in  any  but  a  metaphorical  sense,  as  a  wealth  of  humor  or  good 
spirits,  is  to  confuse  the  fundamental  distinction  between  -man 
and  his  environment.  Wealth  exists  for  man,  but  man  himself 
is  not  wealth  (unless  indeed  he  is  a  slave,  and  then  he  is  wealth, 
not  to  himself,  but  to  some  one  else).  Wealth  may  be  produced 
by  man,  but  it  is  the  product,  not  the  producer,  that  constitutes 
wealth.  The  things  that  form  wealth  are  always  outside  of 
man;   they  are  external,  not  internal,  phenomena. 

This  does  not  mean  that  wealth  is  necessarily  something  tan- 
gible. It  is  indeed  true  that  the  term  "goods"  is  sometimes 
preferred  to  "commodities,"  because  the  latter  is  supposed 
to  imply  something  tangible.  "Commodity,"  however,  really 
means  that  which  "accommodates"  or  is  "commodious"  to  us, 


I  o  Fundamental  Concepts  [§  4 

just  as  goods  are  those  things  that  are  "good  for  us,"  —  both 
in  the  economic  sense.  If,  however,  we  use  "commodity"  to 
designate  some  tangible,  visible  object,  wealth  is  not  confined 
to  commodities.  Utilities  may  be  conferred  not  only  by  in- 
animate objects  but  by  human  services.  A  concert  satisfies  a 
want;  what  we  pay  for  is  not  a  physical  object  but  a  service. 
A  teacher  receives  a  salary;  what  he  gives  in  return  is  some- 
thing intangible.  Services  in  almost  every  case  bring  about 
some  change  in  man's  environment,  and  in  that  sense  even  a 
service  may  be  classed  as  something  material.  But  if  by 
material  we  mean  something  that  has  an  objective  existence,  a 
service  must  be  considered  immaterial.  It  confers  utilities,  it 
is  external  to  man,  it  is  to  that  extent  wealth;  but  it  is  not  vis- 
ible, tangible  wealth.  Yet  the  higher  the  civilization,  the  more 
numerous  will  be  these  forms  of  impalpable  wealth. 

In  reality,  however,  the  distinction  between  commodities 
and  services  is  slighter  than  would  appear  at  first  blush.  For 
in  each  case  we  are  really  dealing  with  services.  The  sole  use 
of  a  commodity  is  the  series  of  services  which  it  can  render. 
Whether  the  music  which  we  hear  comes  from  a  music-box  or 
from  a  human  voice,  whether  the  boat  is  propelled  by  a  man 
or  an  engine,  is  of  no  consequence.  What  we  enjoy  in  each 
case  is  a  service.  The  only  difference  is  that  a  service  dis- 
appears in  the  rendering,  while  a  commodity  often  remains, 
and  is  capable  of  similar  services  in  future.  The  service  is 
evanescent,  the  commodity  is  often  durable.  The  commodity 
may  then  be  regarded  as  the  embodiment  of  a  series  of  stored 
up  services,  to  be  conferred  piecemeal.  But  the  distinction  is 
vague.  For  many  commodities,  like  coal,  ice-cream  and  the 
like,  disappear  in  the  very  act  of  rendering  a  service.  Dura- 
bility is  no  criterion  of  wealth.  An  ephemeral  service  may  be 
of  far  greater  importance  than  a  durable  commodity.  It  is  the 
character,  not  the  length  or  repetition,  of  the  service  which  we 
prize.  The  real  relation  between  a  concrete  commodity  and 
a  service  is  that  the  commodity  is  a  crystallized  service  or  a 


§  4]  Meaning  ot  Wealth  i  i 

scries  of  services.  The  essence  of  wealth  is  an  intlow  of  sat- 
isfactions: utilities  consist  of  services,  whether  or  not  they 
are  embodied  in  physical  objects.  The  very  idea  of  a  ser- 
vice, however,  implies  something  that  flows  in  to  one  from 
the  outside,  whether  the  outside  be  a  man  or  an  object. 
Wealth  is  always  something  external. 

(4)  The  fourth  characteristic  of  wealth  is  limitation  of  supply. 
A  few  goods  and  services  exist  in  such  plenty  that  the  satisfac- 
tion of  our  wants  is  not  affected  by  any  consideration  of  the 
quantity  available.  The  deprivation  of  any  unit  in  the  supply 
will  make  no  difference  to  us.  We  all  need  air,  for  instance,  but 
in  ordinary  circumstances  air  is  free  to  all,  in  unlimited  quan- 
tities. Such  goods  are  therefore  called  free  goods.  The  vast 
majority  of  commodities,  however,  are  not  the  free  gift  of  na- 
ture. They  exist  in  such  limited  amounts  that  we  attach  im- 
portance to  definite  quantities.  If  we  wish  to  utilize  them,  we 
must  be  economical.  Hence  they  are  called  economic  goods 
and  form  the  subject  matter  of  the  science  of  economics. 

Putting  it  in  another  way,  it  may  be  said  that  while  all 
goods  that  render  a  service  possess  a  certain  kind  of  utility, 
only  economic  goods,  or  goods  limited  in  supply,  possess 
that  grade  of  utility  which  results  in  value.  As  we  shall  see 
later,  value  is  an  estimate  of  the  relative  importance  or  utility 
of  definite  quantities  of  goods.  W^hen  we  speak  of  the  value 
of  a  diamond,  the  word  conveys  no  precise  meaning  unless 
we  know  how  large  and  pure  the  diamond  is.  When  we  say 
a  thing  is  useful,  we  do  not  measure  its  grade  of  utility;  but 
when  we  say  a  thing  is  valuable  or  worth  something,  we  at 
once  ask:  how  much?  In  the  case  of  free  goods,  by  which  we 
mean  goods  the  amount  of  which  is  unlimited,  we  attach  no 
importance  to  any  particular  quantity,  that  is,  we  set  no  value 
on  it.  Wealth  might  therefore  be  defined  as  composed  of  things 
that  possess  value,  and  economics  would  then  be  the  science 
of  value. 

In  what  has  preceded  we  have  virtually  affirmed  that  wealth 


1 2  Fundamental  Concepts  [§  4 

means  abundance,  and  at  the  same  time  connotes  limitation 
of  supply.  This  seems  absurd.  The  apparent  absurdity,  how- 
ever, is  removed  by  the  statement  that  wealth  consists  of  an 
abundance  of  things  limited  in  supply.  If  the  supply  is  lim- 
ited, man  will  make  an  effort  to  secure  them;  the  more  scarce 
they  are,  the  more  valuable  they  will  be  and  the  more  effort 
he  will  make.  Economic  action  consists  in  getting  the  great- 
est results  with  the  least  effort.  Anything  which  will  afford  us 
the  same  services  with  less  effort  will  set  free  surplus  energy  for 
other  purposes,  and  thus  increase  our  wealth.  The  irrigation 
tracts  in  the  West  represent  much  effort  and  much  wealth; 
if  water  were  to  become  as  plentiful  there  as  in  the  East,  the 
wealth  of  the  country  would  be  increased,  because  all  the 
efforts  devoted  to  securing  water  would  now  be  devoted  to 
something  else,  let  us  say  to  building  railways.  The  water 
would  no  longer  be  wealth,  just  as  the  air  is  not  wealth,  but 
there  would  be  more  wealth  than  before  because  there  would 
be  a  larger  total  inflow  of  satisfactions.  Before,  we  had  only 
the  water;   now  we  have  the  water  and  the  railroads. 

This  also  explains  the  seeming  opposition  between  wealth 
and  value.  Wealth  is  composed  of  things  having  value,  and 
yet  the  more  we  have  of  anything,  the  less  its  value.  This 
statement  overlooks  the  fact  that,  as  we  shall  see  later  (§  76), 
value  is  an  expression  of  the  relative  importance  of  goods, 
while  wealth  denotes  an  aggregate  of  goods  possessing  value. 
In  the  example  above,  the  value  of  water  indeed  disappeared, 
but  was  replaced  by  that  of  railroads,  previously  not  existing. 
The  reduced  value  of  a  commodity  whose  quantity  increases 
may  be  compensated  by  the  new  value  of  something  which 
did  not  exist  before;  but  the  aggregate  of  wealth  may  be 
augmented.  Thus  increasing  wealth  does  not  mean  decreasing 
value  in  general,  for  the  lower  value  of  some  things  is  balanced 
by  the  higher  value  of  new  things.  An  increase  of  commodities 
can  never  of  itself  engender  a  decrease  of  wealth. 

To  recapitulate,  in  order  to  constitute  wealth,  a  commodity 


§  5]  Wealth  and  Man  i  3 

must  have  four  qualities.  First,  it  must  possess  utility:  if 
the  thing  is  of  no  use,  it  is  not  a  good  at  all.  Secondly, 
it  must  be  appropriable.  Thirdly,  it  must  be  external:  a 
man  may  be  skilful,  but  he  is  not  wealthy  until  he  has 
transmuted  his  skill  into  some  actual  result.  Fourthly,  it  must 
be  limited  in  amount:  if  it  is  free  to  all,  it  may  make  him 
happy,  but  its  possession  will  not  differentiate  him  from  his 
neighbor,  and  he  will  attach  no  specific  value  to  it. 

Since  modern  society  is  based  on  the  interchange  of  posses- 
sions, all  this  can  be  summed  up  in  the  statement  that  wealth 
is  nowadays  anything  that  can  be  exchanged.  If  it  is  not 
useful,  no  one  will  want  it;  if  it  is  not  appropriable,  no  one  can 
get  it;  if  it  is  not  external,  no  one  can  part  with  it;  if  it  is  not 
limited  in  quantity,  no  one  will  give  anything  for  it.  Historically 
and  fundamentally,  however,  wealth  is  anterior  to  exchange. 
Things  do  not  possess  value  because  they  are  exchanged;  they 
are  exchanged  because  they  possess  value. 

5.   Wealth  and  Man 

Wealth,  then,  forms  the  subject  matter  of  economics.  But 
in  what  sense? 

If  a  man  chops  down  a  tree  for  firewood,  he  is  adding  to 
his  wealth.  Yet  discussion  of  the  best  axe  to  be  used  would 
not  be  an  economic  discussion.  We  all  need  light;  yet  a  study 
of  the  relative  merits  of  gas  and  electricity  would  not  necessa- 
rily be  economic  in  character.  We  may  study  wealth  from 
the  technical  as  weU  as  from  the  economic  point  of  view. 
The  technical  study  explains  the  qualities  of  the  thing  itself  or 
in  relation  to  other  things:  economics  deals  with  these  qualities 
only  in  their  relations  to  man.  A  study  of  the  relative  merits 
of  axes  would  be  technical;  a  study  of  the  income  derived 
from  tree-felling  is  economic.  Economics  is  therefore  the 
science  of  man  in  his  business  relations  to  wealth.  The 
emphasis  is  to  be  put  on  the  human  rather  than  on  the  mate- 
rial side  of  the  problem.     Since  wealth  in  its  economic  aspects 


14  Fundamental  Concepts  [§  5 

consists  of  anything  that  has  commercial  value,  economics  may 
also  be  defined  as  the  science  of  value  in  the  sense  of  the 
science  of  human  relations  so  far  as  they  are  affected  by  value. 

Wealth  is  at  bottom  a  surplus  of  satisfactions.  We  may 
therefore  approach  the  subject  from  either  side,  —  that  of  satis- 
faction or  of  want.  In  other  words,  in  dealing  with  the  goods 
that  constitute  wealth  we  must  be  mindful  not  only  of  their 
acquisition,  but  also  of  their  use;  not  only  of  their  production, 
but  also  of  their  consumption.  In  order  to  grasp  the  real 
meaning  of  wealth,  we  must  ask  not  only,  what  have  you  got? 
but,  what  do  you  do  with  it? 

If  a  savage  were  to  find  a  watch  on  the  seashore,  he  might 
prize  it  as  a  trinket.  As  a  watch  it  would  be  of  no  use  to  him. 
For  watches  to  have  any  material  value  presupposes  a  society 
considerably  advanced  in  intelligence.  The  same  commodities 
may  be  relatively  valueless  to  one  generation  and  exceedingly 
valuable  to  another.  At  bottom  it  is  demand  which  sets  in 
motion  those  forces  which  result  in  giving  a  thing  value.  The 
social  demand  for  a  thing  is  due  to  the  uses  to  which  it  can  be 
put.  But  the  uses  to  which  it  can  be  put  depend  not  only  on 
the  thing  to  be  used  but  on  the  individuals  who  use  it.  Wealth 
therefore  depends  in  the  last  instance  on  man. 

Wealth  can  be  increased  only  through  the  multiplication  and 
better  utilization  of  commodities.  The  more  and  better  the 
commodities,  the  wealthier  the  population  as  a  whole.  This 
multiplication  can  take  place  only  in  obedience  to  an  increased 
demand.  Increased  demand,  however,  means  a  diversification 
of  wants.  People  now  want  more  things  of  different  kinds  than 
in  the  earlier  stages  of  society.  The  things  they  want,  however, 
depend  in  last  resort  upon  their  aesthetic,  intellectual  and  moral 
conditions.  The  physical  appetite  of  civilized  man  differs  from 
that  of  the  savage  only  in  its  being  more  refined,  —  that  is, 
more  aesthetic.  It  differs  not  in  quantity,  but  in  quality.  His 
other  appetites  also  change  with  the  development  of  civiliza- 
tion.    The  economic  life  is  therefore  ultimately  bound  up  with 


§  6]  Measure  of  Wealth  i  5 

the  whole  moral  and  social  life.  There  is  a  deeper  meaning  in 
Ruskin's  statements:  "There  is  no  wealth  but  life,"  and  "Nor 
can  any  noble  thing  be  wealth  except  to  a  noble  person."  The 
economist  in  studying  wealth  must  continually  bear  in  mind 
those  forces  which  make  civilized  human  beings;  for,  after  all, 
it  is  not  the  wealth  itself,  but  the  human  beings  who  create 
and  who  use  the  wealth,  that  are  of  fundamental  importance. 
What  a  man  does  with  his  wealth  is  a  vital  question;  for  upon 
the  answer  given  to  this  question  by  society  as  a  whole  depends 
the  growth  of  future  wealth  itself. 

This  is  equivalent  to  saying  that  civilization  consists  in  the 
attempt  to  multiply  wealth,  and  to  render  man  more  amenable 
to  those  higher  forces  which  will  lead  him  to  employ  his  wealth 
in  the  true  interests  of  progress.  The  goal  of  all  economic 
development  is  to  make  wealth  abundant  and  to  make  man 
more  able  to  use  wealth  correctly.  The  real  object  of  eco- 
nomics is  to  explain  the  process  of  making  wealth  cheap,  and 
man  dear.  Education,  science,  art,  ethics,  —  all  have  an  eco- 
ngmic  side. 

6.  The  Measure  of  Wealth  —  Income  and  Capital 

Americans  speak  of  a  man  as  worth  a  million  dollars; 
Englishmen  would  call  an  equally  wealthy  man  at  home  worth 
ten  thousand  pounds  a  year.  In  the  United  States,  land  is 
assessed  for  taxation  at  what  it  will  sell  for;  in  England,  at 
what  it  will  rent  for.  In  the  one  case  we  estimate  wealth  by 
the  capital  value  of  property,  in  the  other  by  the  income  value. 
Capital  and  income  are  thus  here  two  phases  of  the  same  thing. 
Historically  the  reason  is  simple.  In  the  middle  ages  land 
was  the  chief  form  of  wealth,  but  was  rarely  bought  or  sold. 
Under  the  feudal  system  land  had  no  selling  value,  but  only  a 
rental  or  income  value.  A  man  was  rich  when  he  had  a  large 
rent  roll.  The  custom  of  measuring  wealth  by  periodical 
income  finally  spread  to  all  classes  of  society,  because  of  (he 
predominant  influence  of  the  landed  interest.     In  the  American 


1 6  Fundamental  Concepts  [§  6 

colonies,  on  the  other  hand,  land  was  abundant  and  free  from 
feudal  restrictions;  it  was,  therefore,  almost  from  the  begin- 
ning bought  and  sold  like  other  commodities  which  exchanged 
hands  for  definite  sums.  Thus  the  selling  or  capital  value 
came  to  be  the  measure  of  wealth  in  general.  Income  and 
capital  are  therefore  two  aspects  of  wealth.  In  the  one  case 
we  measure  wealth  as  a  flow  of  services  or  stream  of  satisfac- 
tions; in  the  other  case  as  a  stock  of  services  or  fund  of 
satisfactions. 

The  income  measurement  of  wealth  is  the  more  fundamental 
psychologically  as  well  as  historically.  We  desire  things  at 
bottom  because  of  their  utility.  They  can  impart  this  utility 
only  in  the  shape  of  a  succession  of  pleasurable  sensations. 
These  sensations  are  our  true  income.  Income,  in  the  eco- 
nomic sense,  is  the  inflow  of  satisfactions  from  economic  goods. 
When  water  is  free  to  all,  the  pleasure  of  drinking  it  does  not 
constitute  an  income,  just  as  little  as  basking  in  the  sun,  which 
shines  on  rich  and  poor  alike,  is  income.  When  water,  how- 
ever, becomes  so  scarce  that  it  acquires  a  value,  its  use  affords 
in  the  broadest  sense  an  income. 

The  original  conception  of  income  is  therefore  pleasure  or 
benefit  income.  In  modern  times  value  has  come  to  be  esti- 
mated in  terms  of  money,  and  income  is  accordingly  used  in 
general  to  denote  the  inflow  or  revenue  in  money,  —  the  money 
income  as  opposed  to  the  pleasure  or  benefit  income.  If  I 
rent  my  yacht  to  another,  the  return  is  called  income,  because 
the  benefit  comes  in  in  the  shape  of  money;  if  I  use  the  yacht 
myself,  the  return  in  the  form  of  satisfaction  is  not  ordinarily 
called  income.  Yet  they  are  essentiaUy  analogous  phenomena; 
for  no  one  would  pay  a  sum  of  money  for  anything  unless  it 
afforded  him  an  equivalent  amount  of  satisfa1f:tion.  Just  as 
concrete  articles  of  wealth  existed  before  there  was  any  ex- 
change, so  income  existed  before  there  was  any  money.  Amid 
a  society  based  on  money  transactions,  however,  income  de- 
notes any  inflow  of  satisfactions  which  can  be  parted  with  for 


§  6]  Income  and  Capital  i  7 

money.  It  may  nol  be  money  income,  but  it  must  be  capable 
of  being  transmuted  into  money  income. 

As  against  the  income,  which  is  at  bottom  the  service  or 
satisfaction  afforded  by  anything  that  has  value,  is  to  be  put 
capital.  When  we  buy  anything  we  buy  the  right  of  securing 
such  a  satisfaction  or  stream  of  satisfactions,  either  from 
repeated  services  as  such,  or  from  the  commodity  which 
embodies  such  services.  Every  commodity  is  a  store  of 
such  satisfactions.  A  suit  furnishes  a  satisfaction  or  income 
every  time  it  is  worn,  an  axe  affords  an  income  every  time  it 
is  used.  We  may  therefore  cither  pay  for  each  service  as  it  is 
rendered  or  give  a  lump  sum,  which  capitalizes  this  anticipated 
income  or  flow  of  satisfactions.  One  may  rent  the  dress-suit 
every  night  or  buy  it  outright.  The  process  of  valuation 
through  which  we  assign  a  capital  value  to  this  complex  of 
future  income  values  and  through  which  we  transmute  the  flow 
of  satisfactions  into  a  fund  is  a  subtle  one,  to  be  discussed  later. 
The  process  is  taking  place  about  us  every  moment.  Nothing 
would  have  any  capital  value  if  it  had  no  income  value;  capi- 
tal is  capitalized  income. 

This  view  of  capital  has  not  always  been  recognized.  The 
earliest  use,  indeed,  of  the  word  capitale  at  the  close  of  the 
middle  ages  was  to  designate  the  caput,  or  principal  sum  of 
money  from  which  a  revenue  was  expected.  Yet  it  has  become 
customary  among  economists  since  Adam  Smith  not  only  to 
confine  the  term  capital  to  wealth  used  for  further  production, 
in  contradistinction  to  wealth  devoted  to  immediate  consump- 
tion, but  also  to  differentiate  capital  from  land.  Capital 
would  then  be  defined  as  that  part  of  wealth  which  is  the 
result  of  production  devoted  to  further  production.  The 
consequence  has  been  that  capital  has  often  been  regarded  as 
consisting  chiefly  of  the  tools,  machinery,  factories,  ships,  cars 
and  finished  products  of  all  kinds  used  to  increase  production. 

This  is,  however,  at  variance  with  business  usage.  When  a 
wagon  builder,  for  instance,  counts  his  capital  he  always 
2 


I  8  Fundamental  Concepts  [§  6 

includes  his  real  estate.  The  factory  may  indeed  differ  in  such 
important  points  from  the  land  on  which  it  is  built  as  to 
justify  the  erection  of  a  separate  category  for  land,  but  in  one 
sense  they  are  both  classes  of  capital.  Again,  he  includes  in 
his  capital  the  stock  of  finished  goods,  irrespective  of  whether 
the  wagons  are  to  be  used  by  farmers  as  tools  to  garner  the 
crops  or  by  millionaires  for  pleasure.  Finally,  he  includes 
things  that  have  not  been  produced  at  all,  for  instance,  mere 
privileges  or  patent  rights  granted  him  by  government.  His 
capital  thus  comprises  things  that  have  never  been  produced, 
as  well  as  things  that  may  never  be  used  for  further  production. 
Capital  in  this  sense  is  simply  wealth  which  yields  or  can 
yield  an  income.  It  includes  everything  that  has  a  capital 
value.  The  wagon  is  capital  to  the  livery-stable  keeper  because 
his  business  income  is  derived  from  renting  its  use  day  by  day 
to  customers;  the  wagon  is  capital  to  the  farmer  because  it 
helps  him  to  get  an  income  from  the  crop;  the  wagon  is  capi- 
tal to  the  millionaire  because  it  embodies  a  series  of  incomes, 
which  he  actually  enjoys  in  kind  by  riding,  or  which  he  could 
enjoy  in  money  if  he  chose  to  let  it  out  piecemeal  or  to  sell  it 
outright.  If  a  broker  fails,  his  creditors  will  insist  on  including 
in  the  assets  or  capital  not  only  his  stock  exchange  seat,  which 
is  not  the  result  of  any  production,  but  his  real  estate  holdings 
as  well.  Both  have  a  capital  value.  Capital  as  contrasted  with 
income,  therefore,  is  all  wealth  regarded  as  a  store  or  fund. 

In  every  progressive  society  men  seek  to  enlarge  their  flow 
of  satisfactions.  This  can  normally  be  done  not  only  by 
enhancing  personal  efficiency,  but  primarily  by  increasing  or 
improving  the  items  of  wealth  which  embody  this  flow  of 
income.  Economic  progress  thus  normally  rests  upon  the 
devotion  of  existing  wealth  to  the  further  increase  of  wealth; 
and  the  chief  function  of  capital  may  accordingly  without 
great  error  be  declared  to  be  its  productive  use.  But  it  must 
not  be  overlooked  that  the  end  of  production  is  consumption 
and  that  at  bottom  capital  is  capitalized  income. 


§  7]  AVealth,  Money  and  Property  1 9 

While  income  is,  therefore,  the  fundamental  test  of  wealth, 
it  ordinarily  makes  no  difTerence  whether  we  measure  a  man's 
wealth  by  his  income  or  his  capital.  Sometimes,  however,  a 
difficulty  arises.  A  railway  president  or  trust  manager  with  a 
salary  of  fifty  thousand  dollars  a  year  cannot  well  be  called 
poor.  Yet  a  system  of  taxation  based  on  the  measurement  of 
wealth  by  capital,  as  in  the  case  of  the  property  tax,  would 
exempt  him  completely.  The  capital  estimate  of  wealth  is 
here  clearly  inadequate.  On  the  other  hand,  the  customary 
restriction  of  income  to  money  income  is  also  occasionally 
embarrassing.  When  capital  is  so  used  as  not  to  yield  a 
money  income,  as  in  the  case  of  one's  yacht  or  jewels  or 
private  park,  an  income  tax  would  not  reach  the  owner  at  all. 
The  injustice  would  be  no  less  than  in  the  preceding  case. 
Some  modern  tax  laws  indeed  include  in  taxable  income  the 
annual  value  of  a  house  inhabited  by  the  owner.  But  the 
inclusion  of  benefit  income  in  the  case  of  a  house  and  its 
exclusion  in  the  case  of  a  yacht  or  park  are  not  easy  to  justify. 
The  really  safe  measure  of  wealth,  applicable  in  all  cases,  is 
income  in  the  sense  of  pleasure  or  benefit  income. 

7.   "Wealth,  Money  and  Property 

Whether  wealth  be  measured  in  terms  of  capital  or  of  in- 
come, it  is  generally  expressed  in  terms  of  money.  For  wealth 
in  modern  society  is  anything  that  can  be  exchanged,  or  that 
possesses  an  exchange  value,  and  money  is  admittedly  the 
universal  medium  of  exchange.  Hence  wealth  is  sometimes 
identified  with  money. 

It  is  clear,  however,  that  money  is  simply  a  commodity,  and 
forms  only  a  part  of  the  entire  stock  of  wealth.  It  is,  indeed, 
a  most  important  constituent  of  wealth,  but  acquires  this  im- 
portance chiefly  because  it  is  a  representative  of  other  wealth. 
Very  little  of  a  man's  wealth  consists  of  money,  although  it 
can  all  be  converted  into  money.  Money  is  significant  not 
for  itself  but  as  rhe  universal  purchasing  medium.     In  modern 


20  Fundamental  Concepts  [§  7 

society  the  money  needed  to  carry  on  the. daily  business  trans- 
actions is  like  the  lubricating  oil  in  a  machine.  Without  the 
oil  there  would  be  difficulty  in  making  the  machine  work; 
without  the  money  there  would  be  embarrassment  in  conducting 
business.  But  just  as  too  much  oil  would  be  not  only  useless 
but  harmful,  so  the  existence  in  a  country  of  more  money  than 
is  needed  for  the  actual  transactions  would  represent  a  waste 
of  wealth  which  might  otherwise  be  employed  in  production. 
Money  is  wealth,  but  wealth  is  not  money.  Wealth  is  money's 
worth,  but  wealth  and  money  are  by  no  means  identical. 

Finally,  we  sometimes  confuse  wealth  with  property.  In 
reality  they  are  not  convertible  terms.  Property  is  primarily 
a  legal  conception.  It  denotes  the  exclusive  right  of  owner- 
ship in  a  definite  amount  of  wealth.  A  man's  property  is  what 
is  legally  his  own,  whether  his  own  consists  of  capital  or  of 
income,  of  concrete  goods  or  of  mere  rights.  If  a  man  mort- 
gages his  farm  for  half  its  value,  his  real  wealth  in  land  is 
reduced  one-half;  but  the  title  to  the  land  is  still  his,  and  in 
most  states,  Hke  New  York,  he  pays  his  property  tax  on  the 
entire  value.  But  this  was  not  always  so.  Formerly  the  mort- 
gagee or  lender  entered  upon  the  land  and  enjoyed  its  fruits; 
later,  he  still  owned  the  land  legally,  but  left  the  mortgagor  or 
borrower  in  possession;  now  the  land  remains  the  property  of 
the  borrower,  subject  only  to  the  lien  of  the  lender.  From 
the  economic  point  of  view  the  wealth  is  divided  between 
them;  legally  the  land  is  the  property  of  one  party,  as  in 
former  centuries  it  used  to  be  the  property  of  the  other. 
When  a  man  borrows  money  on  mortgage,  he  is  creating  a 
new  form  of  property,  but  not  new  wealth.  There  is  no  more 
land  than  before,  but  there  is  an  additional  property  right  in 
the  shape  of  a  piece  of  paper  or  mortgage  which  represents 
the  title  to  a  certain  income.  So  the  real  estate  and  rolling 
stock  of  a  railroad  constitute  the  property  of  the  corporation, 
while  the  capital  stock  is  the  property  of  the  stockholder. 
They  form  different  kinds  of  property  and  can  be  sold  sepa- 


§  8]  Public  and  Private  Wealth  2i 

rately;  yet  this  duplication  of  property  rights  does  not  increase 
the  amount  of  wealth  in  existence.  Property  is  a  legal  right 
to  wealth;   it  is  not  in  itself  wealth. 

8.   Public  and  Private  Wealth 

While  there  is  in  most  cases  little  difference  whether  we 
use  capital  or  income  as  the  measure  of  private  wealth, 
to  the  wealth  of  the  individual,  the  distinction  becomes  im- 
portant in  the  case  of  public  wealth,  or  the  wealth  of  the 
community  as  a  whole.  To  compute  the  national  wealth, 
as  some  censuses  do,  by  adding  to  the  government  property 
the  capital  or  selling  value  of  all  private  property  is  erro- 
neous, because,  as  has  just  been  pointed  out,  we  should  be 
counting  many  things  twice.  The  only  true  measure  of  public 
wealth  is  income. 

Sometimes  it  is  mistakenly  stated  that  the  test  of  commer- 
cial value  cannot  be  applied  to  public  wealth.  It  is  claimed, 
for  instance,  that  rivers,  climate  and  situation,  which  are  not 
and  cannot  be  sold,  form  the  essential  constituents  of  public 
wealth.  This  involves  the  same  confusion  that  was  encoun- 
tered in  discussing  the  so-called  personal  wealth  of  an  indi- 
vidual (§  4).  Rivers  and  climate  do  not  constitute  wealth. 
They  enable  a  country  to  acquire  wealth,  just  as  intelligence 
or  strength  enables  a  man  to  acquire  wealth.  They  are  the 
source  of  wealth,  but  they  are  not  wealth.  America  under 
the  Indians  had  the  same  rivers  and  climate  as  now,  yet  no 
one  would  speak  of  the  America  of  a  thousand  years  ago  as 
wealthy.  Until  these  natural  advantages  are  converted  into 
actual  results  they  do  not  become  wealth.  When  they  are 
finally  made  to  contribute  to  a  flow  of  income  in  the  shape 
of  finished  products  or  services,  these  products  and  services 
acquire  a  commercial  value  and  constitute  wealth.  The  fun- 
damental test  of  all  wealth  in  modern  times  is  income  in  the 
shape  of  benefits  that  can  be  parted  with,  and  for  which  some- 
thing will  be  given.     Public  wealth,  like  private  wealth,  has  a 


22  Fundamental  Concepts  [§  8 

commercial  value,  but  public  wealth  can  be  estimated  only  in 
terms  of  income,  not  of  capital. 

The  destruction  of  private  wealth  can  never  of  itself  increase 
public  wealth,  but  the  destruction  of  some  forms  of  private 
wealth  may  bring  about  a  far  greater  increase  in  other  forms 
of  private  wealth  and  thus  augment  the  public  wealth.  The 
abolition  of  slavery  annihilated  the  wealth  of  the  slaveholder; 
but  it  created  the  property  of  the  former  slave  in  himself,  and 
led  to  such  an  increase  of  productive  power  that  the  total  out- 
put of  society  was  greater  than  before.  The  property  of  a 
gas  company  may  be  rendered  valueless  by  the  discovery  of 
a  natural  gas  field  owned  by  the  community,  as  in  Toledo. 
Yet  the  destruction  of  the  private  wealth  of  the  shareholder 
is  far  more  than  offset  by  the  fact  that  each  consumer  of  gas  can 
now  devote  to  productive  purposes  the  sums  hitherto  necessary 
to  pay  the  gas  bills.  We  say,  far  more  than  offset,  because  the 
wealth  of  the  shareholders  was  a  capitalization  of  profits,  while 
the  wealth  of  the  gas  consumers  is  now  increased  by  a  sum 
equal  to  the  total  price  of  the  gas,  including  both  cost  and 
profits.  There  is,  in  short,  an  addition  to  the  net  income  of 
society,  and  therefore  an  increase  of  public  wealth. 

Again,  whether  the  annihilation  of  private  wealth  through  a 
change  from  private  to  public  ownership  creates  public  wealth 
or  not  depends  entirely  on  the  success  of  the  undertaking.  If 
a  government  railway  can  be  operated  either  more  cheaply  or 
with  lower  or  more  equal  charges  than  a  private  railway,  there 
will  be  an  increase  of  public  wealth.  The  test  in  every  case  is 
the  flow  of  income  to  the  individuals  that  constitute  society; 
but  this  flow  under  modern  conditions  always  has  a  commercial 
value. 

Since  income  is  the  only  adequate  test  of  public  wealth,  we 
can  speak  of  a  wealthy  country  in  two  senses.  If  we  think  of 
the  aggregate  income,  a  large  country  will  be  called  wealthier 
than  a  small  one;  if  we  think  of  the  average  per  capita  income, 
a  small  country,  like  Belgium,  would  be  wealthier  than  a  large 


§  8]  Public  and  Private  Wealth  23 

one  like  Russia.  Inasmuch  as  the  real  object  of  our  study  is 
not  wealth  in  itself,  but  man  in  his  relation  to  wealth,  it  is 
clear  that  the  second  use  of  the  term  is  preferable.  It  is  the 
participation  of  an  individual  in  the  wealth  of  the  community 
that  makes  social  prosperity. 

The  true  scope  of  economics  is  therefore  the  study  of  the 
forces  which  contribute  to  the  growth  of  the  social  income  or 
public  wealth,  and  which  regulate  the  shares  of  classes  and 
individuals  in  this  flow  of  wealth. 


CHAPTER  II 
ECONOMIC  LAW  AND  METHOD 

9.   References 

L.  Cossa,  Introduction  to  Political  Economy  (1893),  Theoret.  Part, 
rhs.  iii,  vi;  J.  Keynes,  Scope  and  Method  of  Political  Economy  (3d  ed., 
1904),  chs.  ii-iv,  vii-viii;  J.  E.  Cairnes,  Character  and  Logical  Method 
of  Political  Economy  (2d  ed.,  1875),  Lects.  3,  4;  A.  Marshall,  Principles 
(6th  ed.,  1910),  bk.  i,  chs  v,  vi;  N.  G.  Pierson,  Principles  of  Economics 
(1902),  Introd.;  A.  W.  Flux,  Principles  (1904),  ch.  i;  F.  A.  Walker, 
Political  Economy  (3d  ed.,  1888),  part  i;  E.  R.  A.  Seligman,  Economic 
Interpretation  of  History  (1902),  part  2,  ch.  iii;  W.  J.  Ashley,  Surveys 
(1900),  Preliminaries;  A.  C.  Bowley,  Statistics  (1901),  ch.  i;  H  L. 
Moore,  Laws  of  Wages  (1911);  R.  Mayo-Smith,  Statistics  and  Economics 
(1899),  ch.  i;  H.  Sidgwick,  Scope  and  Method  of  Economic  Science 
(1886);  J.  Koren  (ed.)  The  History  of  Statistics  (1918);  G.  C.  Lewis, 
On  the  Methods  of  Observation  and  Reasoning  in  Politics  (1852),  ch.  iii; 
E.  A.  Ross,  The  Foundations  of  Sociology  (1905),  chs.  i,  ii. 

On  the  Mathematical  Method.  W.  S.  Jevons,  Theory  of  Politi- 
cal Economy  (2d  ed.,  1879),  Preface;  F.  Y.  Edgeworth,  (i)  Mathe- 
matical Psychics  (1881);  (2)  On  the  Application  of  Mathematics  to 
Political  Economy  (Jour.  Stat.  Soc,  LII,  1889);  (3)  On  the  Representa- 
tion of  Statistics  by  Mathetnatical  Formulce  {Ibid.,  LXI-LXII,  189S- 
1899);  I.  Fisher,  Mathematical  Investigations  in  the  Theory  of  Value 
and  Prices  in  Conn.  Acad.,  Transactions,  IX  (1892);  C.  Cunynghame, 
A  Geometrical  Political  Economy  (1904). 

10.  Meaning  of  Economic  Law- 
It  is  sometimes  questioned  whether  there  are  such  things  as 
economic  laws.  The  problem  has  often  been  complicated  by 
the  failure  to  distinguish  between  the  various  meanings  of  the 
term  law.  (i)  Law  may  denote  a  body  of  customary  usages, 
as  the  common  law,  or  primitive  law.  (2)  Law  may  mean  a 
statutory  enactment,  as  a  law  of  Congress.  (3)  Law  may  sig- 
nify a  rule  of  action  or  a  precept,  as  a  moral  law.  (4)  Law 
may  mean  the  statement  of  relations  of  cause  and  effect  be- 

24 


§  lo]  Economic  Law  25 

tween  phenomena,  as  a  law  of  physics.  When  we  speak  of 
economic  law,  we  properly  use  the  word  in  the  last  sense. 
Everything  that  happens  in  the  universe  is  related  either  as 
cause  or  as  effect  to  some  other  thing.  It  is  the  function  of 
science  to  ascertain  this  relation,  and  to  formulate  the  law 
which  explains  the  relation.  In  this  sense  every  scientific 
law  is  a  natural  law,  because  it  deals  with  the  phenomena  of 
nature,  because  it  explains  the  natural  or  necessary  relations 
between  things.  A  scientific  law  states  that  definite  causes 
necessarily  lead  to  definite  results. 

Since  economics  is  the  science  of  industrial  relations,  an 
economic  law  is  a  natural  law  so  far  as  it  interprets  the  rela- 
tions of  human  nature  to  industrial  facts.  Everything  that 
occurs  in  economic  fife  takes  place  in  accordance  with  some 
law;  it  is  the  function  of  the  economist  to  ascertain  this  law. 
Only  in  this  sense  can  we  speak  of  an  immutable  economic 
law.  An  economic  law  does  not  mean  a  precept  or  rule  of 
action;  there  is  nothing  immutable  about  a  rule  of  action. 
To  speak  of  a  law  of  free  trade,  for  instance,  is  unmeaning. 
An  economic  law  affirms  that  if  certain  causes  exist,  certain 
results  are  sure  to  follow.  The  facts  themselves,  whether  of 
human  nature  or  of  the  outward  world,  may  differ;  but  given 
definite  facts,  definite  consequences  will  ensue.  The  relation 
between  these  facts  is  capable  of  being  expressed  in  a  state- 
ment of  cause  and  effect,  which  we  call  a  scientific  law. 

It  must  not  be  overlooked,  however,  that  economic  laws 
are  essentially  hypothetical.  We  must  be  quite  sure  that  the 
premises  are  true  to  actual  life  before  we  can  draw  a  conclusion 
applicable  to  existing  facts.  So  far  as  the  premises  are  only 
partially  true,  the  conclusions  are  only  partly  valid.  This  does 
indeed  not  prove  that  there  are  no  economic  laws,  but  only 
that  the  law  may  not  yet  have  been  ascertained,  or  that  the 
particular  statement  of  the  law  in  question  is  only  provisional. 
In  this  respect  economic  law  does  not  differ  from  any  other 
scientific  law. 


26  Economic  Law  and  Method  [§  lo 

In  one  point,  however,  the  laws  of  all  the  social  sciences  do 
differ  from  those  of  natural  science.  The  social  sciences  deal 
with  man,  and  man  is  himself  a  continually  changing  factor. 
Man  is  a  product  of  history;  economic  institutions,  like  all 
other  social  facts,  have  their  roots  in  the  past.  What  is,  is  the 
outcome  of  what  has  been.  With  every  mutation  in  outward 
conditions  and  social  relations  there  comes  a  change  in  the 
economic  facts  or  in  the  methods  devised  to  secure  adaptation 
of  means  to  end.  Nothing  is  so  rare  as  the  historical  per- 
spective; nothing  so  difficult  to  realize  as  the  relativity  of 
existing  institutions.  At  one  stage  of  scientific  inquiry,  for 
instance,  it  was  assumed  that  private  property  was  a  natural 
phenomenon,  an  outcome  of  the  very  nature  of  man.  It  is 
now  seen  that  private  property  is  not  an  absolute,  but  an  his- 
torical category;  that  the  conception  itself  was  of  slow  growth, 
and  that  its  content  varies  from  age  to  age.  What  is  true  of 
private  property  is  true  of  almost  every  other  economic  institu- 
tion. It  has  grown  to  be  what  it  is;  it  has  once  been  differ- 
ent, and  will  again  be  different.  While  there  is  life,  there  will 
be  change. 

In  outward  nature,  on  the  other  hand,  we  operate  with  forces 
that  are  in  one  sense  unchanging.  For  instance,  in  discuss- 
ing physical  or  astronomical  facts  we  are  justified  in  taking 
for  granted  the  existence  of  gravitation.  In  discussing  eco- 
nomic facts,  however,  it  would  not  be  safe  to  assume  in  every 
case  the  existence,  in  unimpaired  activity,  of  the  motive  of  self- 
interest.  Not  only  may  there  be  counteracting  forces  —  for 
that  is  true  also  of  physics  —  but  the  motive  itself  may  suffer  a 
change.  We  cannot  appeal  to  the  natural  law  of  self-interest 
in  the  same  sense  that  we  speak  of  the  natural  law  of  gravita- 
tion. The  one  is  dependent  on  man,  the  other  is  independent 
of  man.  In  this  sense  there  are  no  "natural"  laws  in  social 
science.  The  frequent  appeal  in  current  discussion  to  the 
natural  laws  of  society  as  something  apart  from  man,  and  over 
which  he  has  no  control,  is  erroneous.     There  are  no  natural 


§  lo]  Economic  Law  27 

laws  in  the  sense  that  man  himself  is  powerless  to  alter  the  con- 
ditions which  form  the  basis  of  the  statement. 

The  French  school  of  Physiocrats  in  the  eighteenth  century 
first  applied  to  economics  the  conception  of  natural  law  as  a 
part  of  the  order  of  nature,  from  the  overwhelming  necessity 
of  which  no  one  could  escape.  John  Stuart  Mill,  although  he 
still  held  fast  to  the  old  conception  of  natural  law  as  applied 
to  production,  pointed  out  that  the  laws  of  distribution  were 
themselves  capable  of  being  modified  by  human  agency.  Mod- 
ern science  has  shown  that  what  is  true  of  distribution  is  equally 
true  of  production,  and  that  there  is  no  natural  law  as  a  part 
of  a  natural  order  in  any  field  of  economic  inquiry.  The  old 
conception  of  natural  law  has  been  abandoned  in  economics, 
as  it  has  been  given  up  in  politics  and  jurisprudence.  In  its 
stead  has  been  put  the  more  modern  idea  of  natural  law,  in 
the  sense  of  scientific  law.  Modern  natural  law  is  essentially 
hypothetical  in  character  and  carries  with  it  no  moral  implication. 

We  must  be  careful,  then,  not  to  confuse  the  two  concep- 
tions. An  economic  law  is  a  natural  law  so  far  as  it  states  that 
given  conditions  will  lead  to  given  results.  An  economic  law 
is  not  a  natural  law  so  far  as  it  implies  that  human  effort  is 
impotent  to  modify  the  conditions  which  lead  to  the  results.. 

It  was  as  a  protest  against  the  natural  law  of  the  old  econo- 
mists that  the  term  historical  law  was  introduced.  Some  of  the 
newer  writers  urged  that  the  essential  point  was  to  study  the 
evolution  of  economic  law  itself  as  embodied  in  the  changes  of 
economic  life.  To  them  the  only  economic  laws  were  the  his- 
torical laws  which  throw  light  upon  the  growth  of  society  and 
trace  the  development  of  economic  relations.  This,  however, 
also  involved  an  exaggeration,  in  that  it  put  more  emphasis 
on  the  past  than  on  the  present,  and  often  failed  to  afford  an 
adequate  analysis  of  existing  fads.  This  particular  controversy 
has  now  fortunately  been  laid  to  resl. 

Another  objection  to  the  idea  of  economic  law  may  be  men- 
tioned.    We  frequently  hear  it  said  that  something  is  true  in 


28  Economic  Law  and  Method  [§  n 

theory  but  not  in  practice.  The  fallacy  of  this  statement  is 
evident  when  we  reflect  that  a  theory  is  nothing  but  the  formu- 
lation of  a  law,  a  statement  of  the  necessary  relations  between 
facts.  If  a  thing  is  true  in  theory,  it  must  be  true  in  practice. 
The  difficulty  is  to  formulate  the  correct  theory.  When  people 
say  it  is  easy  to  "theorize,"  they  mean  that  it  is  easy  to  frame 
an  alleged  theory.  Nothing  is  harder  than  to  construct  a  true 
theory.  For  a  true  theory  must  fit  into  every  fact;  otherwise 
it  is  not  the  correct  theory.  The  hasty  and  untrue  generaliza- 
tions of  those  that  set  themselves  up  as  "theorists"  are  really 
responsible  for  the  seeming  antagonism.  There  can  be  as  little 
divergence  between  true  economic  theory  and  actual  economic 
life  as  between  the  theory  of  chemistry  and  chemical  phenom- 
ena. It  is  the  theory  which  must  be  made  to  fit  the  facts,  and 
not  the  facts  which  must  be  twisted  to  suit  the  theory. 

11.  Methods  of  Economic  Investigation 

With  the  broader  conception  of  economic  relations,  the  old 
contest  over  method  has  been  relegated  to  the  background. 
It  was  formerly  much  discussed  whether  economics  was  a  de- 
ductive or  an  inductive  science;  whether,  in  other  words,  we 
should  start  out  from  certain  general  principles,  or  attempt 
to  reach  these  principles  through  the  interrogation  of  facts. 
Sometimes  the  contrast  between  them  was  expressed  by  the 
term  abstract  or  analytical,  as  opposed  to  the  concrete  or  his- 
torical or  comparative  method. 

There  is  at  present  a  substantial  agreement  among  econo- 
mists that  both  methods  are  correct,  and  that  it  would  be  a 
mistake  to  assert  the  predominance  of  either.  It  is  a  ques- 
tion not  of  economics  in  general,  but  of  the  particular  prob- 
lems to  be  solved.  In  some  the  one  method  is  more  fruitful, 
in  some  the  other.  In  such  a  problem  as  the  incidence  of  taxa- 
tion the  historical  or  inductive  method  would  be  of  little  avail, 
because  of  the  difficulty  of  disentangling  the  fundamental  cause 
from  among  the  complicated  facts  of  actual  life.     In  such  a 


§  12]  Relation  to  Other  Sciences  29 

problem  as  the  variation  between  piece  wages  and  time  wages 
the  deductive  or  abstract  method  would  probably  not  bring 
us  to  our  goal  so  quickly.  Each  method  has  its  advantages  and 
its  limitations.  In  the  deductive  method  we  can  be  sure  of  our 
conclusions  only  after  checking  them  by  the  facts;  in  the  induc- 
tive method  we  cannot  formulate  the  law  until  we  find  that  it 
is  in  harmony  with  well-established  principles.  In  the  one  case 
we  start  from  the  principle  and  reach  the  facts;  in  the  other 
we  start  from  the  facts  and  attain  the  principle.  Neither  can  be 
successfully  divorced  from  the  other.  In  most  cases  of  reasoning, 
indeed,  we  use,  consciously  or  unconsciously,  each  method  in  turn. 
Each  method,  again,  when  pushed  to  an  extreme  is  either 
dangerous  or  barren.  The  earlier  advocates  of  the  abstract 
or  analytical  school  sometimes  framed  their  generalizations 
hastily,  and,  through  their  failure  to  make  allowance  for  the 
numberless  counteracting  tendencies,  often  gave  an  appearance 
of  unreality  to  their  conclusions.  Such,  for  example,  was  the 
celebrated  wages-fund  theory  (§  173).  The  more  ardent  fol- 
lowers of  the  concrete  or  historical  school  have  sometimes  ex- 
aggerated the  difficulty  of  reaching  general  laws  at  all,  and 
have  left  us  to  wander  aimlessly  in  the  forest  of  facts,  putting 
ofT  to  an  ever-distant  day  their  analysis  and  utilization.  On  the 
other  hand,  the  more  moderate  advocates  of  each  method  have 
accomplished  a  real  advance.  The  historical  school  has  shown 
that  we  can  really  understand  what  is  only  through  a  com- 
prehension of  what  has  been,  and  that  the  problems  of  funda- 
mental importance  to  social  well-being  are  those  of  change. 
The  analytical  school  has  shown  that  the  particular  is  of  value 
only  as  illustrating  the  general,  and  that  no  true  progress  in 
economic  reasoning  can  take  place  until  we  frankly  recognize 
the  need  and  the  existence  of  general  principles. 

12.   Relation  ©f  Eeenomies  t©  Other  Seienees 

In  the  modern   hierarchy  of  thought    the  points  of  contact 
between   the  various  sciences   are   continually   becoming   more 


3©  Economic  Law  and  Method  [§  12 

numerous.  We  recognize  ihe  possibility  of  regarding  facts  from 
different  points  of  view.  With  increasing  differentiation,  on 
the  other  hand,  there  also  comes  the  recognition  of  increasing 
unity. 

With  some  sciences  the  points  of  contact  have  been  empha- 
sized only  in  recent  years,  —  as,  for  instance,  with  psychology 
and  biology.  The  economist  whose  chief  concern  is  with  the 
law  of  value  necessarily  operates  with  the  data  of  psychology. 
Value  can  have  no  existence  apart  from  the  mental  conditions 
of  man.  The  whole  conception  of  demand  is  essentially  psycho- 
logical. While,  however,  the  connection  between  psychology 
and  economics  is  real  and  intimate,  it  may  be  doubted  whether 
the  psychological  treatment  of  economic  relations  can  carry  us 
much  further  than  to  the  comprehension  of  the  elementary 
principles  of  valuation.  In  the  same  way,  it  was  at  one  time 
the  fashion  to  apply  biological  concepts  to  economic  life,  and 
to  speak  of  the  economic  organism,  the  economic  structure 
and  the  economic  functions.  It  is,  however,  coming  more  and 
more  to  be  recognized  that  these  are  vague  analogies  rather  than 
identities;  that  the  laws  of  life  in  the  economic  world  are  not 
the  same  as  those  in  the  physical  world;  and  that  the  only 
real  aid  which  biology  can  give  to  economics  is  to  enforce  the 
conviction  that  in  social  as  in  animal  life  there  is  continual 
growth  and  perpetual  change. 

With  another  class  of  sciences,  mathematics  and  statistics, 
the  relation  is  more  intimate,  but  primarily  from  the  point  of 
view  of  method.  Economics  deals  in  one  sense  with  quanti- 
tative relations.  Market  values  are  expressed  in  figures;  and 
mathematics  is  of  undoubted  aid  in  enabling  us  to  make  a 
short  cut,  as  it  were,  through  the  mazes  of  figures.  Both  alge- 
bra and  geometry  have  frequently  been  employed  with  suc- 
cess; and  it  is  remarkable  that  some  of  the  greatest  steps  in 
advance  in  the  pure  theory  of  economics  hav^e  been  taken  by 
those  who,  like  Cournot  or  Gossen  or  Jevons  or  Marshall,  ap- 
proached the  subject  from  the  mathematical  side.     The  advo- 


§  17,]  Relation  to  Politics  31 

cates  of  the  mathematical  method,  however,  are  apt  to  overshoot 
the  mark.  They  often  forget  that  the  range  of  questions  with 
which  they  can  deal  is  essentially  limited,  because  social  pro- 
cesses cannot  readily  be  reduced  to  exact  quantitative  form. 
They  do  not  always  remember  that  the  variables  wdth  which 
they  operate  are  often  precisely  the  important  factors  in  social 
life;  and  that  human  aspirations  and  human  needs  cannot  be 
pent  up  within  the  confines  of  a  mathematical  formula,  no 
matter  how  broad  it  may  appear.  Within  a  narrow  field  the 
mathematical  method  can  be  used  to  great  advantage,  but  it 
will  always  be  of  more  use  to  the  writer  than  to  the  reader. 

In  the  case  of  statistics  the  danger  is  of  the  opposite  kind. 
In  mathematics  the  difficulty  is  to  get  a  law  which  will  not  be 
so  all-embracing  as  to  be  inapplicable  to  real  life.  In  statis- 
tics, even  granted  that  we  have  collected  the  true  figures,  the 
difficulty  consists  in  distilling  from  them  any  general  principle 
of  lasting  value.  In  the  first  case  we  run  the  risk  of  formu- 
lating unrealities;  in  the  second  of  stating  platitudes.  What 
was  said  in  a  preceding  section  of  the  abstract  and  the  con- 
crete .methods  of  investigation  applies  with  augmented  force 
here.  The  mathematical  method  is  the  abstract  method  pushed 
to  an  extreme;  the  statistical  method  is  the  concrete  method 
pushed  to  a  like  extreme.  Statistics  form  an  indispensable 
adjunct  to  economic  inquiry,  but  they  are  of  value  principally 
for  purposes  of  illustration  rather  than  of  construction.  They 
show  us  that  there  is  a  reign  of  law  in  the  moral  as  well  as  in 
the  physical  world;  they  do  not  always  enable  us  to  ascertain 
the  law. 

13.  Relation  of  Economics  to  Politics  and  Other  Moral 
Sciences 

When,  however,  we  come  to  the  moral  sciences,  of  which 
economics  itself  is  one,  we  notice  a  more  intimate  relation. 
These  are  politics,  jurisprudence  and  ethics. 

(i)  The  study  of  politics  or  the  science  of  the  slate  has  gone 


32  Economic  Law  and  Method  [§  13 

through  several  stages.  For  a  long  time  history  was  domi- 
nated by  the  "great  man"  theory  of  politics;  attention  was  cen- 
tered chiefly  in  the  kings  and  the  battles,  the  court  intrigues 
and  military  problems.  At  a  later  period  more  emphasis  was 
put  on  the  development  of  institutions  compared  with  which 
any  individual,  however  eminent,  was  insignificant.  Finally, 
it  was  recognized  that  political  life  itself  is  closely  intertwined 
with  the  economic  life,  and  that  the  forms  as  well  as  the  prac- 
tices of  government  are  profoundly  influenced  by  the  conditions 
of  production  as  well  as  by  those  of  distribution.  Economic 
facts  would  then  be  the  cause;  political  phenomena  the  result. 
On  the  other  hand,  since  all  modern  economic  action  is  car- 
ried on  within  the  framework  of  the  state,  when  we  deal  with 
any  practical  economic  institution  no  final  solution  of  the  prob- 
lem can  be  reached  until  the  effect  of  the  political  conditions 
be  weighed.  In  discussing  the  economic  consequences  of  govern- 
ment ownership,  for  instance,  the  status  of  the  governmental 
civil  service  is  a  potent  consideration.  Political  facts  may 
profoundly  modify  the  economic  conditions,  instead  of  being 
modified  by  them.  While,  therefore,  politics  deals  with  the 
relation  of  the  individual  to  the  government,  and  economics 
with  one  aspect  of  the  relations  of  individuals  to  each  other, 
there  is  almost  always  a  distinct  interaction  between  the  two. 
It  is  a  necessity  for  the  publicist  to  comprehend  the  economic 
basis  of  political  evolution;  it  is  the  business  of  the  economist 
to  remember  the  political  conditions  which  affect  economic  phe- 
nomena. 

(2)  What  has  been  said  of  politics  applies  with  still  greater 
force  to  jurisprudence.  All  systems  of  law  are  in  the  main  the 
crystallization  of  long-continued  social  usage.  Social  customs 
are  coeval  with  the  origin  and  growth  of  society  itself;  the 
mandatory  force  of  the  positive  law  comes  at  a  later  stage  in 
the  evolution.  The  unwritten  gradually  turns  into  the  written 
law,  until  the  positive  enactment  is  invested  with  the  sanction 
of  a  sovereign  command.     As  society  develops,  the  law  is  in 


§  13]  Relation  to  Politics  33 

a  perpetual  process  of  change.  No  code  is  final;  it  always 
represents  a  given  stage  of  social  life.  The  law  is  the  outward 
manifestation;  the  social,  and  especially  the  economic,  fact  is 
the  living  force.  The  formal  juristic  conception  may  remain 
the  same;  its  content  must  be  modified  by  every  change  of 
economic  life.  Legal  history  is  really  a  handmaid  to  economic 
history;  legal  development  is  inexplicable  apart  from  economic 
forces.  The  economic  fact  in  this  sense  is  the  cause;  the  legal 
situation  is  the  result.  . 

At  any  given  moment,  however,' economic  phenomena  take 
place  within  a  legal  framework.  The  elemental  forces  of  eco- 
nomic life  cannot  indeed  in  the  long  run  be  conditioned  by 
legal  forms;  but  the  law  may  for  a  time  hold  in  check,  or  give 
a  new  direction  to,  economic  forces.  Take  as  an  example  the 
English  law  of  primogeniture  and  of  entailed  estates  as  com- 
pared with  the  French  laws  which  have  led  to  the  system  of 
small  farms.  History  is  full  of  instances  where  the  law  has  for 
good  or  for  evil  affected  the  economic  environment.  Just  be- 
cause the  economic  life,  however,  is  prior  to  the  legal  system, 
there  is  always,  at  any  given  moment,  the  danger  of  a  lack  of 
harmony  between  the  two.  It  is  in  the  interval  between  the 
economic  changes  and  the  readjustment  of  the  legal  facts  that 
the  influence  of  law  upon  economics  is  keenly  felt.  Life  indeed 
consists  of  a  perpetual  adaptation  of  outward  forms  to  inner 
forces,  and  thus  the  economic  basis  of  a  legal  system  is  really 
the  important  fact  to  the  social  philosopher.  In  practical  life, 
however,  we  deal  with  outward  forms,  and  thus  the  legal  shape 
of  the  economic  relations  must  never  be  lost  from  sight.  In 
economics  and  jurisprudence  there  is  continual  action  and 
reaction. 

(3)  Close  as  are  the  relations  of  economics  with  both  poli- 
tics and  jurisprudence,  the  connection  between  economics  and 
ethics  is  closer  still.  This  has  often  been  denied.  In  the 
popular  mind  there  is  even  an  idea  that  there  is  a  real  conflict 
between  them.     In  truth,  this  seeming  conflict  can  be  traced 


34  Economic  Law  and  Method         [§  13. 

back  at  least  as  far  as  Adam  Smith;  for  he  based  his  system 
of  political  economy  on  the  principle  of  self-interest,  his  system 
of  ethics  on  the  principle  of  sympathy.  Thus  there  grew  up 
the  idea  that  the  two  leading  motives  of  human  action  are  the 
purse  and  the  conscience;  that  the  economic  man  is  repre- 
sented by  the  one  and  the  ethical  man  by  the  other;  that  there 
is  a  hopeless  conflict  between  them;  and  that  economics  and 
ethics  have  nothing  to  do  with  each  other. 

The  modern  view,  however,  is  different.  Ethics,  like  juris- 
prudence and  politics,  is  now  recognized  as  essentially  social,  in 
its  origin.  All  individual  ethics  are  seen  to  be  the  outgrowth 
of  social  ethics.  The  very  conception  of  right  and  wrong  was 
originally  a  social  conception,  afterwards  transferred  to  the 
individual.  Since  man  lives  in  society,  whatever  was  recog- 
nized as  making  for  the  general  good  came  to  be  regarded  as 
the  test  of  morality.  For  individuals  to  persist  in  doing  what 
was  not  for  the  social  benefit  must  finally  have  ended  in  the 
destruction  of  society,  and  therefore  of  the  individual  himself 
as  a  member  of  society.  Social,  not  individual,  utility  there- 
fore unconsciously  became  the  criterion.  When  we  say  honesty 
is  the  best  policy,  we  do  not  mean  that  it  is  always  expedient 
for  the  particular  individual  to  be  honest,  for  we  unfortunately 
know  of  cases  to  the  contrary.  What  we  mean  is  that  honesty 
is  the  best  policy  for  society,  and  therefore  has  become  right 
for  the  individual  as  well.  Ages  upon  ages  of  this  experience  have 
converted  this  and  similar  conclusions  into  a  human  instinct, 
and  have  thus  made  us  realize  the  existence  of  the  categorical 
imperative  as  the  sovereign  moral  law.  The  whole  ethical 
progress  of  man  consists  in  conforming  his  actions  to  the  ideal 
social  welfare. 

There  can  therefore  be  no  conflict  between  correct  economic 
action  and  true  ethical  theory.  Adam  Smith's  principles  are 
indeed  true,  but  they  are  complementary,  not  antagonistic. 
Sympathy  or  altruism  pushed  to  an  extreme  involves  the  destruc- 
tion of  self  and  therefore  the  death  of  society;    self-interest  or 


§  14]  Scope  of  Economics  35 

egoism  pushed  to  an  extreme  means  the  destruction  of  others 
and  therefore  Hkewise  the  death  of  society.  Social  Hfe  can 
endure  only  through  a  balancing  of  these  two  principles,  each 
reinforced  by  the  other.  Since  economics,  like  ethics,  is  pri- 
marily a  social  science,  the  true  economic  action  must  in  the 
long  run  be  an  ethical  action.  An  individual  may  pursue  selfish 
economic  ends,  and  may  augment  his  own  wealth  at  the  cost 
of  moral  progress;  but  he  is  then  subordinating  public  to  private 
considerations.  Broadly  speaking,  and  regarded  from  the  point 
of  view  of  society  as  a  whole,  what  is  economically  advantage- 
ous must  in  the  long  run  be  right;  and  what  is  correct  in  ethics 
must  in  the  end  also  be  profitable  to  the  business  world.  The 
modern  economist  therefore  has  become  just  as  mindful  of  the 
ethical  aspects  of  every  economic  problem  as  the  modern  moral- 
ist has  been  forced  to  recognize  the  economic  side  of  his  ethical 

problem. 

14.    Scope  of  Economics 

From  what  has  been  said  it  will  be  seen  that  the  scope  of 
economics  is  varied.  This  cannot  be  expressed  in  the  old 
way  by  distinguishing  between  pure  economics  and  applied  or 
practical  economics.  In  the  first  place,  no  such  sharp  line 
can  be  drawn;  and,  secondly,  even  if  the  two  parts  could  be 
distinguished,  they  would  not  cover  the  whole  field  of  eco- 
nomic inquiry. 

The  distinction  between  pure  and  apphed  economics  has 
been  much  exaggerated.  If  the  study  of  economic  theory  has 
any  justification  at  all,  it  must  fit  into  the  facts  of  actual  bus- 
iness life.  There  may,  indeed,  be  such  a  thing  as  pure  mathe- 
matics, which  discusses  conclusions  from  premises  that  exist 
only  in  the  mind  of  the  investigator  and  find  no  counterpart  in 
actual  life.  But  if  there  is  such  a  thing  as  pure  economics  in 
this  sense,  it  would  be  of  no  earthly  use  except  as  a  logical 
exercise  or  a  play  of  the  imagination.  Economics  is  the  sci- 
ence of  industrial  relations,  —  not  as  they  might  exist  hypo- 
thetically  in  the  mind  of  the  investigator,  but   as  they  really 


36  Economic  Law  and  Method  [§  14 

exist.  Economic  law  must  explain  economic  facts;  the  law  in- 
heres in  the  facts,  the  facts  are  the  embodiment  and  illustration 
of  the  law.  The  attempted  distinction  between  pure  and  applied 
economics  is  a  clumsy  way  of  putting  the  emphasis  on  the  two 
sides  of  the  same  thing,  —  the  law  in  its  relation  to  the  facts. 

Sometimes  the  distinction  is  expressed  in  another  way,  as 
when  economic  science  is  opposed  to  economic  art.  This  is 
indeed  a  distinction;  but  economic  art  does  not  deal  with 
principles  at  all,  it  deals  with  precepts.  Economic  art  is  an 
awkward  expression  for  the  economics  of  statesmanship.  The 
legislator  practises  economic  art;  he  may  or  may  not  study 
economic  principle.  If,  however,  he  runs  counter  to  the  prin- 
ciple, he  cannot  succeed  in  the  art. 

In  the  second  place,  the  old  distinction  between  pure  and 
applied  economics  is  untenable,  because  the  discipline,  whether 
in  its  abstract  form  or  in  its  application,  is  made  to  deal  only 
with  actual  conditions.  The  preceding  analysis  has  disclosed 
the  inadequacy  of  this  point  of  view.  Economics  is  to  teach 
us  to  understand  the  principles  of  industrial  life.  Its  chief 
object,  indeed,  is  to  explain  to  us  what  is.  If  all  society,  how- 
ever, is  the  result  of  an  evolution,  we  can  understand  what  is 
only  by  knowing  what  has  been.  Moreover,  if  the  relation 
of  economics  to  ethics  is  such  a  close  one,  it  is  equally  evi- 
dent that  we  can  criticise  the  present  not  only  in  the  light  of 
the  past,  but  in  the  light  of  the  future;  and  that  a  discussion 
of  social  tendencies  at  once  brings  up  the  question  of  what  ought 
to  be.     Economic  inquiry  is  teleological  as  well  as  historical. 

In  every  phase  of  our  study,  therefore,  we  must  endeavor  first 
to  ascertain  how  the  particular  relations  have  come  to  be  what 
they  are;  secondly,  to  explain  what  are  the  conditions  of  the 
problem  as  it  actually  exists;  and,  finally,  to  forecast  the  prob- 
able changes  in  the  institutions  as  a  result  of  an  alteration  in 
the  conditions  of  the  problem.  Economic  science,  in  short, 
while  it  deals  primarily  with  the  present,  cannot  avert  its  glance 
from  the  past  or  from  the  future. 


Part   II 
Element{^  ot  Economic  Life 


Book  I 
Foundations  of  Economic  Life 


CHAPTER   III 
THE  NATURAL  ENVIRONMENT 

15.   References 

C.  de  Montesquieu,  Spirit  of  the  Laws  (last  ed.,  1902);  H.  T.  Buckle, 
History  of  Civilization  in  England  (best  ed.,  3  vols.,  1873);  H.  Spencer, 
Principles  of  Sociology,  I  (1882),  part  i,  ch.  iii;  E.  J.  Payne,  History  of 
America,  I  (1892),  298-480;  E.  Huntington,  Civilization  and  Climate 
(1915);  E.  C.  Semple,  American  History  a>id  its  Geographical  Conditions 
(1903);  and  Influence  of  Geographic  Environment  (191 1);  A.  P.  Brigham, 
Geographic  Influences  in  American  History  (1903);  G.  G.  Cliisholm, 
Handbook  of  Commercial  Geography  (8th  ed.,  1913);  N.  S.  Shaler,  The 
United  Stales  (2  vols.,  1894);  J.  Brunhes,  Human  Geography  (1920); 
R.  S  Tarr  Etonomu  Ceotogy  of  the  United  States  (1900) ;  R.  P.  Teele, 
Irrigation  in  the  United  States  (1915);  E.  Mead,  Irrigation  Institutions 
(1902);  Finch  and  Barker,  Geography  of  the  World's  Agriculture  (1917); 
R.  M.  Hurd,  Principles  of  City  Laiui  Values  (1903),  chs.  iii,  iv;  E.  A. 
Ross,  Foundations  of  Sociology  (1905),  chs.  viii,  x. 

16.   Climatic  and  Geological  Conditions 

Man,  like  all  animals,  is  indissolubly  bound  to  the  soil.  He 
is  in  last  resort  dependent  upon  nature  for  what  he  is  and  what 
he  has  accomplished.  This  is  especially  true  of  his  economic 
life,  which,  as  we  have  seen,  consists  ultimately  of  his  relation 

37 


38  Ndtural  Environment  [§  16 

to  material  things.  The  basis  of  economic  activity  is  the 
material  environment.  The  modern  sciences  of  geology,  of 
meteorology  and  of  commercial  and  anthropo-geography  have 
enabled  us  to  comprehend  phenomena  whose  significance  was 
until  recently  but  vaguely  apprehended.  The  economic  aspects 
of  the  natural  environment  may  be  subsumed  under  the  four 
heads  of  the  climate,  the  geological  structure,  the  flora  and 
fauna  and  the  geographical  location. 

Only  a  portion  of  the  globe  is  habitable.  The  uninhabitable 
parts,  moreover,  change  with  the  geologic  ages.  Large  sec- 
tions of  Northern  Europe  and  America  which  are  now  the  homes 
of  a  vast  population  were  aeons  ago  in  the  perpetual  embrace 
of  the  ice  king.  On  the  other  hand,  explorations  in  the  sandy 
wastes  of  the  Asiatic  deserts  have  brought  to  light  the  ruins  of 
numerous  and  populous  cities.  Not  only  economic  life,  but 
all  life,  is  at  the  mercy  of  the  elemental  forces  of  nature. 

Even  in  the  habitable  portions  of  the  globe  the  climatic  con- 
ditions are  of  the  first  importance.  At  the  very  outset  the 
influence  of  temperature  is  obvious.  The  vigor  of  the  arctic 
regions  and  the  bounty  of  the  tropical  zone  are  alike  hostile 
to  economic  progress.  Where  the  food  supply  is  scanty  and 
the  low  temperature  benumbing,  human  resources  are  taxed  to 
the  utmost  in  securing  the  bare  wherewithal  of  life,  and  no 
surplus  energy  is  left  to  accumulate  a  store  of  wealth.  Where, 
on  the  other  hand,  nature  pours  out  her  treasures  with  a  lavish 
hand,  and  the  torrid  heat  enervates  and  lulls  into  lethargy, 
scarcely  any  activity  is  needed  to  procure  subsistence,  and 
little  is  ordinarily  exerted  for  other  purposes.  Although  we 
have  had  civilization  in  hot  countries,  the  real  home  of  the 
greatest  economic  progress  has  always  been  in  the  temperate 
zones,  where  man  is  goaded  out  of  his  natural  laziness  by  the 
prick  of  want,  and  lured  on  to  effort  by  the  hope  of  reward. 

In  many  other  ways  does  climate  affect  economic  life.  The 
alternations  of  heat  and  cold,  both  seasonal  and  occasional, 
are  of  commanding  importance.     The  character  and  length  of 


§  i6]  Climatic  Conditions  ^9 

the  seasonal  allernalions  condition  the  size  and  (juahly  of  the 
harvest.  The  variations  of  intra-seasonal  temperature  with 
its  sudden  oscillations  go  far  to  explain  the  nervous,  active 
American  temperament  and  its  economic  results,  as  compared 
with  the  comparative  stolidity  of  the  English,  due  to  an  equable 
climate.  Scarcely  second  to  the  influence  of  temperature  is 
the  significance  of  the  rainfall  and  the  humidity.  Insufficiency 
of  moisture  and  lack  of  sunshine  are  alike  inimical  to  economic 
welfare.  Not  only  will  differences  in  rainfall  affect  the  forestry 
conditions,  as  well  as  the  size  and  therefore  the  economic  utility 
of  the  rivers,  but  in  addition  the  laborious  contest  with  a  semi- 
arid  region  will  create  in  the  individual  stalwart  economic  and 
political  qualities.  The  so-called  Anglo-Saxon  individualism 
is  largely  the  product  of  climatic  conditions.  When  the  English- 
man leaves  his  moist  and  fertile  home  for  the  almost  riverless 
wastes  of  the  antipodes,  he  becomes,  if  not  a  socialist,  at  all 
events  the  next  remove  to  one.  In  Australia  we  accordingly 
find  government  railroads,  government  insurance,  government 
steamships,  government  frozen-meat  industry  and  many  other 
examples  of  government  activity  which  would  be  viewed  with 
dismay  in  the  mother  country. 

In  the  same  way  the  individualist  theory  in  America  is  largely 
the  product  of  definite  economic  conditions,  resting  on  a  new 
climatic  environment.  What  careful  interpreter  of  American 
history  does  not  know  that  the  arduous  struggles  with  a  rebel- 
lious soil  and  an  inhospitable  climate  caused  the  American  of  a 
century  ago  to  turn  to  government  whenever  he  thought  he 
might  secure  help?  State  roads,  state  canals,  state  railroads, 
state  bounties,  state  enterprises  of  all  kinds  suited  to  the  needs 
of  the  settlers  were  the  order  of  the  day.  When,  however, 
the  mountains  had  been  crossed  and  the  fertile  valleys  of  the 
Middle  West,  with  abundant  rainfall  and  a  genial  climate,  had 
been  reached,  there  came  a  wondrous  change.  Conscious  of  their 
new  opportunities,  the  citizens  now  desired  only  to  be  let  alone 
in  their  quest  for  prosperity.     Private  initiative  replaced  govern- 


40  Natural  Environment  [§  i6 

mcnt  assistance  and  the  age  of  corporations  was  ushered  in. 
Insensibly  the  theory  of  governmental  functions  changed,  and 
the  doctrine  of  laissez  /aire  carried  all  before  it.  The  theory 
of  individualism  was  a  natural  result  of  the  economic,  and  at 
bottom  of  the  climatic,  conditions  of  a  new  environment. 

While  the  climate  is  one  of  the  causes  that  influence  the 
earth's  surface,  the  economic  life  is  profoundly  affected  by  the 
entire  geological  formation.  In  the  first  place  we  have  the  fun- 
damental fact  of  altitude,  including  the  distinction  between 
mountain  and  valley,  coast  and  plain,  with  their  varying  degrees 
of  production.  Furthermore,  upon  the  chemical  ingredients 
and  the  physical  constituency  of  the  soil  rests  in  last  analysis 
its  original  fruitfulness.  The  difference  between  the  soil  of  the 
black  belt  and  the  hill  lands  of  Alabama  explains  the  varying 
aspect  of  the  negro  problem  there;  and  in  like  manner  the 
contrast  between  the  arable  and  the  grazing  lands  of  the  Far 
West  enables  us  to  comprehend  the  economic  and  political  con- 
flicts between  the  farmer  and  the  ranchman. 

Of  still  more  importance  than  the  surface  of  the  earth  is 
what  lies  beneath  the  surface.  There  are  writers  who  interpret 
the  entire  progress  of  humanity  in  terms  of  the  metals.  While 
this  is  assuredly  an  exaggeration,  there  is  no  doubt  that  the 
metals  have  played  a  dominating  role  in  the  history  of  economic 
progress.  In  more  primitive  times  the  advance  of  civilization 
was  in  many  places  in  large  measure  bound  up  with  the  copper 
and  tin  deposits.  Even  at  present,  with  the  active  interchange 
of  commodities,  the  mineral  wealth  in  the  shape  of  copper  and 
iron  fields,  gold  and  silver  mines,  lead  and  tin  deposits,  goes 
far  to  explain  the  preponderance  of  the  fortunate  countries  or 
sections  where  they  are  found.  If  we  add  to  the  metals  the 
coal,  the  diamond  and  the  oil  fields,  we  shall  readily  recog- 
nize the  enormous  influence  exerted,  especially  in  modern 
times,  by  the  existence  of  these  mineral  treasures  in  such 
places  as  Colorado,  Pennsylvania,  Western  England,  and  South 
Africa. 


ly]  Geographical  Location  41 

17.   The  Flora,  the  Fauna  and  the  Geographical  Location 

i  The  character  and  extent  of  the  vegetable  and  animal  life 
are  a  result  of  the  cUmatic  and  geological  conditions  that  have 
just  been  mentioned.  Upon  the  union  in  proper  proportions 
of  rain,  sun  and  chemical  ingredients  of  the  soil  depends  the 
possibility  of  raising  all  the  staple  crops  like  hay,  wheat,  cotton, 
rice,  tobacco,  sugar,  coffee  or  tea,  or  of  obtaining  the  timber, 
rubber,  cork  and  other  products  of  the  forest.  The  American 
Indian  civilization  was  buUt  up  to  a  large  degree  on  maize,  as 
that  of  the  Asiatic  Indian  largely  rested  on  rice.  If  cotton 
was  king  in  the  South  before  the  war,  wheat  and  hay  were  to  a 
great  extent  the  monarchs  in  the  North.  The  control  of  these 
natural  resources  is  responsible  for  many  of  the  mutations  of 
nations.  To  give  only  two  examples:  the  struggle  for  the  spice 
islands  of  the  East  is  the  key  that  unlocks  the  mysteries  of  the 
European  political  contests  of  the  sixteenth  and  seventeenth 
centuries;  the  sugar  situation  in  Cuba  led  to  the  revolution 
which  brought  about  our  recent  Spanish  war,  and  thus  indirectly 
the  expansion  of  the  American  republic  into  imperialism. 

Of  at  least  equal  importance  in  early  economic  progress  is 
the  existence  of  animals  that  can  easily  be  domesticated.  The 
fact  that  the  horse,  the  cow  and  the  sheep  were  found  in  Asia 
rendered  possible  the  transition  from  the  hunting  to  the  pas- 
toral stage  and  laid  the  foundation  of  the  later  economic  edifice 
of  the  more  advanced  Asiatic  and  European  races.  For  these 
animals  subserved  the  various  ends  not  only  of  food  supply 
and  provision  of  clothing,  but  of  means  of  locomotion  and  above 
all  of  beast  of  burden.  Their  absence  in  recent  geological 
periods  in  America  was  perhaps  the  chief  cause  of  the  backward- 
ness of  the  Indians.  Where  a  relatively  advanced  civilization 
was  reached,  as  by  the  Incas  in  Peru,  it  was  in  great  part  due  to 
the  existence  of  the  llama,  although  the  inferiority  of  this  animal 
to  the  horse,  the  cow  and  the  sheep  explains  in  large  measure 
the  backwardness  of  the  South  American  civilization.     In  Aus- 


42  Natural  Environment  [§  17 

tralia  there  was  nol  even  I  his  resource,  for  the  kangaroo  coiilfl 
not  be  utihzed  and  the  l)la(k.fellow  remained  a  savage. 

In  contrast  to  the  tlora  and  fauna  which  are  of  importance 
from  the  first,  favorable  situation,  although  it  also  plays  a  role 
from  the  outset,  becomes  of  signal  importance  in  the  later 
stages  of  economic  life  when  commerce  has  developed.  Irox- 
imity  to  the  sea,  possession  of  a  safe  and  ample  harbor,  loca- 
tion on  a  river,  —  all  these  explain  the  maritime  supremacy  on 
which  so  much  of  past  civilization  has  rested.  It  is  no  mere 
accident  that  the  world's  progress  centred  for  many  centuries 
around  the  Mediterranean,  and  that  Egypt,  Greece  and  Rome 
in  turn  controlled  for  thousands  of  years  the  destinies  of  the 
human  race.  Passing  over  the  mediaeval  Italian  seaports  and 
the  German  Hansa  towns,  it  is  again  significant  that  the  two 
greatest  metropohtan  centres  of  the  world  to-day,  London  and 
New  York,  have  attained  their  position  chiefly  because  of  their 
maritime  importance.  Some  writers  have  even  gone  so  far  as 
to  maintain  that  all  civilization  can  be  expressed  in  terms  of 
the  great  rivers  and  seas.  Of  tlie  twenty  largest  cities  of  the 
United  States,  nine  are  found  on  the  seacoast,  five  on  the 
Northern  lakes,  and  five  on  the  Mississippi  and  Ohio  rivers. 

It  would,  however,  be  a  mistake  to  lay  too  much  stress  upon 
mere  water  communication.  Trade  conducted  on  lerra  firma 
has  played  a  scarcely  smaller  role.  Many  a  populous  city  is 
nothing  but  the  development  of  a  cross-roads  village,  become 
the  busy  mart  of  transit  on  a  great  thoroughfare.  The  centres 
of  the  Babylonian  and  Assyrian  civilization  of  old  were  largely 
of  this  character;  and  to  a  similar  favorable  inland  situation 
must  we  ascribe  the  prosperity  of  numerous  cities  in  all  parts 
of  the  world  to-day,  such  as  Berlin,  Manchester  (England), 
and  Denver,  especially  w^here  the  rivers  are  few  or  small.  A 
distinguished  French  author,  Demolins,  has  even  ventured  to 
explain  the  existence  of  the  primary  social  types  of  humanity 
by  the  land  routes  which  the  various  nations  traversed  in  the 
course  of  the  long   migrations  from   their  ancestral  home   to 


§  i8]  Change  of  Environment  43 

their  present  abodes.  However  exaggerated  this  insistence 
upon  a  single  factor  may  be,  there  is  little  doubt  as  to  the  car- 
dinal influence  of  location  upon  commercial  opportunities. 

With  the  further  development  of  economic  life,  commerce 
becomes  a  handmaid  not  only  to  agriculture  but  to  industry. 
The  industrial  centres  are  dependent  not  only  on  the  commer- 
cial facilities  for  disposing  of  their  products,  but  also  upon  the 
ease  with  which  they  can  secure  the  raw  material  and  cheap 
power.  Contiguity  to  the  coal  and  iron  fields  explains  the 
growth  of  the  great  steel  industries.  The  presence  of  local 
water  power  made  possible  the  early  centres  of  the  textile 
industries  in  New  England,  as  well  as  the  rapid  growth  of 
Minneapolis  in  milling.  The  grain  fields  of  the  Middle  West 
are  responsible  for  the  breweries  in  the  Western  and  the  distil- 
leries in  the  Eastern  States  adjoining  the  Mississippi.  The 
slaughtering  and  meat-packing  centres  have  gradually  moved 
west  with  the  change  in  the  ranching  frontier,  and  the  incipient 
industries  of  the  Pacific  slope  are  still  largely  determined  by 
their  propinquity  to  the  forests,  the  orchards  or  the  river 
fisheries. 

18.   Change  of  Environment 

While  man  is  thus  subservient  to  nature  in  his  economic 
activities,  the  subjection  is  not  complete.  In  fact  the  distin- 
guishing mark  of  difference  between  men  and  animals  is  that 
while  the  natural  environment  moulds  all  living  things,  man 
alone  can  to  some  extent  modify  the  environment.  This  partial 
control  of  economic  resources  depends  on  the  spread  of  intel- 
ligence, the  growth  of  technique  and  the  command  that  science 
gives  over  the  forces  of  nature. 

Of  all  the  natural  conditions  the  climate  is  the  most  diflicult 
to  alter.  Yet  even  here  a  beginning  has  been  made.  We  pass 
over  with  a  mere  mention  such  minor  points  as  the  mitigation 
of  the  effects  of  undue  heat  through  the  introduction  of  artifi- 
cial ice,  or  the  creation  of  the  proper  atmospheric  conditions 
in  certain  factories.     More  significant  are  the  effects  of  forestry 


44  Natural  Environment  [§  i8 

and  irrigation.  It  is  now  coming  to  be  recognized  that  forests 
play  an  important  role,  not  so  much  in  affecting  the  rainfall,  as 
in  equalizing  the  flow  of  the  rivers  and  thus  obviating  the  sudden 
alternations  of  inundation  and  drouth  with  their  devastating 
effects  on  cultivation.  The  afforestation  of  treeless  lands  and 
the  reforestation  of  denuded  hillsides  are  at  present  a  part  of 
the  economic  policy  of  every  careful  government.  The  marked 
increase  in  the  American  forest  reservations,  state  as  well  as 
national,  is  therefore  a  subject  for  congratulation. 

The  conditions  of  moisture  are  further  affected  by  the  drain- 
age and  reclamation  of  swamps  and  marshes.  Prominent 
illustrations  of  such  effects  are  visible  in  the  English  fens  and 
the  once  submerged,  but  now  dyke-protected,  lands  of  Hol- 
land. The  history  of  the  Italian  Maremma,  again,  shows  the 
alternate  consequences  of  neglect  and  intelligent  effort  on  climate 
and  soil.  Even  greater  results  can  be  achieved  by  diminishing 
aridity  rather  than  by  decreasing  excessive  moisture.  Irrigation 
was  practised  by  the  Babylonians,  the  Persians  and  other  na- 
tions of  antiquity,  and  on  a  somewhat  larger  scale  by  the  Arabs 
of  mediaeval  Spain.  The  recent  damming  of  the  Nile  by  the 
British  constitutes  perhaps  the  high-water  mark  of  modern 
achievement.  It  is  in  the  United  States,  however,  that  the 
greatest  conquests  of  irrigation  are  to  be  expected.  With  the 
gradual  exhaustion  of  the  arable  area  in  our  public  domain  the  de- 
mand for  a  reclamation  of  the  so-called  arid  lands  has  been 
urged  with  increasing  intensity.  The  success  of  the  Mormons 
in  Utah  and  the  efforts  of  a  few  private  companies  in  California 
and  elsewhere  in  converting  the  desert  into  a  smiling  and  exu- 
berantly fertile  district  have  shown  what  can  be  accomplished. 
The  Newlands  law  of  1902  which  set  aside  for  irrigation  pur- 
poses under  national  control  the  large  sums  to  be  derived  from 
the  sales  of  public  lands  marks  the  beginning  of  a  new  epoch 
in  American  history,  for  it  will  ultimately  lead  to  the  recovery 
of  several  tens  of  millions  of  acres  and  to  the  influx  of  corre- 
sponding millions  of  settlers. 


§  i8]  Changes  in  Environment  45 

The  nature  of  the  soil  as  affected  by  geological  conditions 
is,  as  we  have  seen,  of  momentous  significance.  Yet  nothing 
is  more  certain  than  the  great  influence  of  human  effort  on  the 
character  of  the  soU.  Just  as  the  best  land  can  become  the 
poorest  through  wasteful  cultivation,  so  the  worst  land  can  be 
converted  into  the  most  fruitful.  The  application  of  manures, 
both  animal  and  mineral,  and  the  replacement  of  an  extensive 
by  an  intensive  cultivation  with  the  proper  rotation  of  crops 
will  soon  change  the  chemical  ingredients  of  the  soil.  The 
problem  is  not  one  of  technical  possibility,  but  of  economic 
profit.  Up  to  this  time  there  has  been  in  the  greater  part  of 
the  western  world  such  an  abundance  of  successively  fresh 
tracts  of  land  that  adequate  returns  have  been  achieved  by  the 
extensive  methods  of  cultivation  involving  only  the  most  super- 
ficial tUlage.  Even  the  so-called  more  intensive  cultivation 
has  denoted  onl5^  the  slightest  application  of  capital  to  land. 
In  the  Oriental  countries,  on  the  other  hand,  the  ignorance  of 
scientific  agronomy  has  made  intensive  culture  depend  almost 
wholly  upon  the  hand  and  not  the  head.  What  is  really  meant 
by  the  possibilities  of  the  application  of  science  and  capital 
to  agriculture,  in  some  such  proportions  as  they  are  now  uti- 
lized in  industry,  may  be  faintly  discerned  in  the  garden  patches 
and  truck  farms  in  the  neighborhood  of  great  cities.  In  cer- 
tain parts  of  Europe,  in  fact,  the  tenant  on  the  expiration  of 
the  lease  has  the  right  of  carting  away  with  him  a  certain  depth 
of  soil.  The  land  itself  is  thus  coming  to  be  in  a  sense  the 
product  of  human  energy. 

While  the  existence  of  the  flora  and  the  fauna  ultimately 
depends  on  the  physical  environment,  there  is  a  large  margin 
of  indift'erence  within  which  old  species  may  be  reintroduced 
or  new  ones  made  to  flourish.  Many  plants  in  all  parts  of  the 
world  are  not  indigenous.  To  mention  only  a  few  American 
products,  rice  and  cotton  in  the  South,  the  sugar  beet  and  the 
alfalfa  in  the  West,  as  well  as  all  kinds  of  vegetables  and  fruits 
throughout  the  length  and  the  breadth  of  the  land,  have  been 


46  Natural  Environment  [§  i^ 

introduced  by  human  agency  from  abroad;  and  the  experiment 
stations  are  constantly  at  work  improving  the  seed.  To  pass 
from  plants  to  animals,  there  is  no  need  of  pointing  out  the 
marvellous  results  accomplished  in  bettering  the  breed  and 
economic  efficiency  of  the  horse,  the  ox  and  the  sheep,  none 
of  which  were  found  here  in  the  age  of  Columbus. 

19.   Changes  in  Location 

By  far  the  most  important  achievement  of  man  in  altering 
the  natural  environment  is  to  be  seen  in  his  success  in  over- 
coming the  influences  of  location.  This  has  been  effected 
through  a  threefold  improvement  in  the  methods  of  trans- 
portation and  communication,  that  is,  the  transportation  of 
commodities,  the  transmission  of  power  and  the  communi- 
cation of  ideas. 

(i)  Upon  the  transportation  of  commodities  has  depended 
the  growth  of  all  internal  trade  and  international  commerce. 
The  very  conception  of  commerce  involves  the  transfer  of  the 
superfluities  of  one  section  to  the  consumers  of  another,  that 
is,  the  weakening  or  the  annihilation  of  distance  as  an  eco- 
nomic factor.  So  long  as  commerce  was  dependent  upon  the 
safl-boat  or  the  slow-moving  beast  of  burden,  this  annihilation 
of  distance  found  its  well-defined  limits  in  the  cost  and  time 
of  transportation.  With  the  invention  of  the  canal  and  the 
application  of  steam  and  electricity  to  land  and  sea  transport, 
a  revolution  was  effected  in  the  saving  of  cost  and  time,  and 
perishable  as  well  as  bulky  commodities  were  now  brought 
within  the  range  of  both  ordinary  and  distant  trade.  The 
railway  has  largely  replaced  natural  advantages  of  situation  by 
artificial  ones.  A  town  on  the  railway  line  is  for  all  economic 
purposes  nearer  the  market  than  another  off  the  line,  even  if 
possessed  of  a  better  natural  location.  A  competitive  centre 
at  the  junction  of  several  roads  enjoys  a  superiority  which  will 
enable  it  to  overcome  a  rival  more  advantageously  situated  by 
nature  but  less  well  served.     With  the  increase  of  facilities  and 


§  iq]  Changes  in  Location  47 

lowering  of  cost,  geographical  situation  is  yielding  to  the  facts 
of  artificially  created  location. 

Changes  in  transportation  facilities  accordingly  are  largely 
responsible  for  the  growth  and  decline  of  cities,  sections  and 
nations.  With  every  shifting  of  trade  routes,  communities  ad- 
vance and  recede.  Again  to  confine  ourselves  to  recent  history, 
the  completion  of  the  Erie  canal  in  1825  gave  to  New  York,  then 
a  city  of  secondary  importance,  a  position  of  undisputed  pre- 
eminence; the  construction  of  many  a  railroad  threw  into  decay 
the  villages  on  the  old  post-roads  not  served  by  the  new  Hnes; 
the  piercing  of  the  Isthmus  of  Panama  by  the  interoceanic  canal 
will  have  the  most  far-reaching  consequences  on  the  industrial 
efficiency  of  the  South  and  the  prosperity  of  Great  Britain. 

(2)  If  transportation  of  this  kind  is  so  potent  in  affecting 
the  distribution  of  commodities  and  thus,  by  providing  a  mar- 
ket, indirectly  influencing  their  production,  changes  in  the 
transmission  of  power  are  equally  effective  in  their  direct  in- 
fluence. So  far  as  power  is  the  result  of  fuel,  whether  coal, 
wood  or  oil,  it  might  be  claimed  that  the  transmission  of  power 
is  tantamount  to  the  transportation  of  the  commodities  out  of 
which  the  power  is  generated.  The  recent  application  of  elec- 
]|  tricity,  however,  bids  fair  to  revolutionize  modern  industry, 
not  only  by  reducing  cost,  but  by  virtually  overcoming  distance. 
Through  transmission  of  electricity  water  power  is  no  longer 
limited  in  its  beneficent  results  to  the  localities  in  the  imme- 
diate neighborhood.  With  the  gradual  extension  of  the  prof- 
itable area  of  such  transmission,  we  may  expect  to  witness  a 
great  change  in  the  geographical  dependence  of  industrial 
centres.  Moreover,  if  the  day-dreams  of  certain  scientists 
are  ever  realized,  so  that  in  the  not  distant  future  we  shall 
be  able  to  pick  up  electricity  from  the  surface  of  the  earth, 
the  last  link  in  the  chain  of  the  industrial  advantages  of  natural 
location  of  power  will  be  destroyed. 

It  must  also  not  be  forgotten  that  power  in  industry  includes 
not  only  mechanical  power,  but  human  power.     The  provision 


48  Natural  Environment  [§  19 

of  the  labor  force  itself  is  vitally  affected  by  changes  in  the 
facilities  of  transportation.  In  a  modern  metropolis  it  may 
be  of  comparatively  little  importance  whether  it  takes  a  few 
hours  more  or  less  to  transfer  commodities  to  the  home  or  the 
factory.  Beyond  a  certain  limit,  however,  almost  every  minute 
counts  in  the  time  required  for  the  human  worker  to  reach  his 
home.  The  introduction  of  electric  transportation  prodigiously 
augmented  the  possible  size  and  industrial  power  of  modern 
cities,  but  the  bringing  of  the  suburbs  within  the  city  limits 
has  greatly  affected  values,  and  changed  the  relative  advan- 
tages, industrial  as  well  as  domestic,  of  outlying  and  inter- 
mediate areas.  There  is  a  well-nigh  kaleidoscopic  change 
going  on  in  the  conditions  of  geographical  location. 

(3)  Finally,  the  communication  of  inteUigence  has  played 
its  part  in  reducing  the  significance  of  geographical  location. 
The  post,  the  telegraph  and  the  telephone  have  co-operated 
with  other  economic  factors  in  giving  to  the  modern  market 
an  international  character.  The  least  change  in  the  visible 
supply  of  wheat  in  Minnesota  or  of  cotton  in  Texas  is  reflected 
in  the  market  at  Liverpool.  Any  alteration  in  the  conditions 
of  the  tobacco  yield  in  Java  or  of  the  tea  crop  in  China  is  felt 
in  the  exchanges  of  New  York.  But,  above  all,  the  dependence 
of  particular  sections  or  countries  upon  mere  location  has  been 
weakened  in  a  special  sense  by  the  spread  of  modern  science. 
vScience  is  international  in  its  working;  the  utilization  of  dis- 
covery and  invention  is  no  longer  the  exclusive  possession  of  a 
favored  nation.  The  whole  world  is  becoming  akin  in  produc- 
tion, as  in  consumption. 

Thus  it  is  clear  that  while  external  nature  still  plays  its  fun- 
damental role  in  explaining  the  economic  life  of  man,  the  pro- 
gress of  civilization  is  utilizing  in  countless  ways  certain  natural 
forces  to  counteract  and  to  minimize  the  influence  of  other  nat- 
ural forces.  Nature  at  bottom  remains  the  mistress,  but  man 
can  within  certain  limits  emancipate  himself  from  the  bondage, 
and  secure  a  mastery  which  will  insure  prosperity  and  progress. 


CHAPTER   IV 

THE   POPULATION 

20.   References 

C.  D.  Wright,  Practical  Sociology  (Am.  Citizen  Series,  191 2),  chs.  ii,  v, 
viii;  R.  Mayo-Smith,  Statistics  and  Sociology  (1895),  part  i;  A.  F.  Weber, 
Growth  of  Cities  (1899),  chs.  iii,  v,  vi;  Thirteenth  Census,  volumes  on 
Population;  W.  F.  Willcox,  A  Discussion  of  the  Increase  of  Population 
(Census  Bulletin,  No.  4,  1904);  U.  S.  Industrial  Commission,  Report,  XIX 
(1902),  1-13;  Tenement  House  Department  of  New  York  City,  First  Re- 
port (2  vols.,  1904);  W.  Ogle,  On  Marriage  Rates  and  Marriage  Ages  (Jour. 
Stat.  Soc,  LIII,  1890) ;  C.  V.  Drysdale,  The  Small  Family  System  (1914) ; 

F.  S.  Crum,  Marriage  Rate  in  Massachusetts  (Am.  Statist.  Assoc.  Publica- 
tions, V,  1896),  and  Birth  Rate  in  Massachusetts  (Quart.  Jour.  Econ.,  XI, 
1897);  R.  R.  Kuczynski,  The  Fecundity  of  the  Native  and  Foreign  Born 
Population  in  Massachusetts  {Ibid.,  XVI,  1902);  J.  Bonar,  Malthus  and 
his  Work  (1885);    H.  Spencer,  Principles  of  Biology,  part  vi,  ch.  xii; 

G.  H.  Knibbs,  The  Mathematical  Theory  of  Population  (191 7);  F,  A. 
Fetter,  Economic  Principles  (1915),  chs.  32,  7,3',  E.  A.  Ross,  Founda- 
tions of  Sociology  (1905),  ch.  ii;  J.  B.  Clark,  Essentials  of  Economic 
Theory  (1907),  ch.  .xix. 

21.   Density  of  Population 

While  the  problem  of  external  nature  is  primarily  physical, 
that  of  population  is  principally  biological  and  sociological. 
Population,  however,  also  has  its  economic  aspects.  It  touches 
the  field  of  production  in  so  far  as  there  is  a  relation  between 
the  size  and  constitution  of  the  population  and  the  creation 
of  wealth;  it  affects  the  subject  of  distribution  because  with 
a  given  quantity  of  production,  the  per  capita  dividend  will 
obviously  be  influenced  by  the  size  of  the  divisor. 

The  subject  falls  naturally  under  the  heads  of  the  status 
Hnd  the  movement  of  the  population.  By  the  status  of  the 
4  49 


50  Population  [§  21 

population  are  meant  its  density  and  distribution;  under  the 
movement  of  population  we  have  to  consider  its  increase  and 
its  mobility. 

The  density  of  the  population  is  conditioned  by  the  charac- 
ter of  the  economic  resources  and  the  degree  of  economic  de- 
velopment. That  is,  it  depends  not  only  upon  the  external 
environment,  but  upon  the  use  made  of  it  by  man.  The  den- 
sity and  distribution  of  population  as  dependent  upon  drainage, 
altitude,  temperature  and  humidity,  which  play  a  considerable 
role  in  the  tables  of  the  American  census,  may  be  passed  over 
here  as  referable  to  the  influence  of  the  natural  elements.  The 
human  element,  by  transforming  the  environment,  becomes 
the  increasingly  important  factor  in  economic  progress.  It 
is  manifest,  for  instance,  that  the  hunting  stage  can  support 
less  inhabitants  to  the  square  mile  than  the  pastoral,  and  that 
an  agricultural  population  must  be  more  thinly  scattered  than 
a  population  engaged  in  industry.  In  an  agricultural  com- 
munity, again,  the  density  of  the  population  will  vary  with  the 
character  of  cultivation.  Population  is  indeed  conditioned  by 
food  supply;  but  food  supply  depends  not  only  upon  the  num- 
ber of  acres  but  upon  the  product  per  acre. 

When  a  community  is  no  longer  self-dependent,  and  carries 
on  exchange  with  another,  greater  inequality  in  the  density 
of  population  becomes  possible.  Industrial  and  commercial 
communities  barter  their  finished  products  for  the  raw  ma- 
terials of  agricultural  sections.  While  the  total  population 
still  depends  on  the  total  food  supply,  the  surplus  food  of  the 
agricultural  group  is  secured  by  the  industrial  and  commercial 
group,  with  the  result  of  a  greater  concentration  of  population 
in  the  latter.  Density  of  population  in  any  particular  country 
or  section  which  has  outgrown  primitive  economic  conditions 
thus  depends  not  so  much  on  the  production  of  food  as  on  the 
existence  of  the  wealth  which  can  procure  food.  England  had 
all  through  the  middle  ages  a  far  sparser  population  than  France, 
because  although  they  both  exported  wheat  it  was  more  pre- 


DISTRIBUTION  OF  THE  POPUI  | 

iRetn-euiuced  from  Bmfi 


BunUAT  i  CO.,  H-Y- 


I  OF  THE  UNITED  STATES,  1900. 

f.  jelfth  U.  S.  CeTiatisJ 


§  2i]  Density  of  Population  51 

dominantly  agricultural;  bul  in  the  nineteenth  century,  with 
the  prodigious  increase  in  industry  and  commerce,  England 
became  a  food  importer  and  the  density  of  the  English  popula- 
tion soon  exceeded  that  of  the  French.  The  following  table, 
which  gives  the  number  of  inhabitants  per  square  mile  in  1900- 
1910,  will  show  the  influence  of  economic  condition  on  density: 

1900  1910  1900  1910 

Belgium 589  661  S\\atzerland       .     .  207  235 

England 437  615  France    ....  188  191 

Netherlands     ....  416  460  India      ....  167  178 

United  Kingdom        .     .  344  474  Spain      ....  97  100 

Japan 296  344  United  States        .  25  30.9 

Italy 294  313  Turkey  ....  21 

Germany 270  311  Russia     ....  19 

Austria 226  225  Canada  ....  1.75    1.90 

The  striking  facts  here  are,  first,  that  a  very  intensive  agri- 
culture combined  with  a  moderate  commerce,  as  in  China  and 
Japan,  can  support  a  population  as  dense  as  that  of  a  highly 
developed  modern  industry;  and  secondly,  that  the  greatest 
density  is  found  in  those  countries,  like  Belgium,  England  and 
Holland,  which  unite  very  diversified  industry  with  a  fairly 
intensive  agriculture.  The  relative  capacity  of  economic  stages 
to  support  population  is  illustrated  by  the  conditions  of  the 
United  States.  The  census,  as  appears  from  the  map  opposite 
page  50,  divides  the  country  into  six  groups  with  a  density 
respectively  of  less  than  2,  2  to  6,  6  to  18,  18  to  45,  45  to  90,  and 
over  90  inhabitants  to  the  square  mile.  The  first  group  com- 
prises the  hunting,  trapping,  fishing,  lumbering  and  mining 
sections;  the  second  includes  the  grazing  communities;  the 
third  contains  the  purely  agricultural  areas;  in  the  fourth  group, 
still  mainly  agricultural,  commerce  and  manufactures  have 
commenced  to  make  some  progress;  while  in  the  fifth  and 
sixth  groups  there  is  a  continually  greater  influence  of  industry. 
Computed  by  states  rather  than  by  sections,  there  were  in  1910 
ten  commonwealths  with  a  density  of  over  100,  namely,  Illinois, 
Delaware,    Ohio,    Maryland,    Pennyslvania,    New    York,    Con- 


52 


Population 


[§    22 


neclicut,  New  Jersey,  Massachusetts  and  Rhode  Island.  The 
conditions  in  each  state  are  indicated  in  the  chart  opposite 
page  52.  It  thus  appears  that  in  some  of  the  industrial  com- 
monwealths the  density  of  population  is  about  equal  to  that 
of  Europe. 

22.   Concentration  of  Population 

Slightly  different  from  the  density  is  the  concentration  of 
population.  This  refers  to  the  distribution  between  city  and 
country.  A  greater  density  generally,  but  not  necessarily,  im- 
plies a  greater  agglomeration.  New  Hampshire,  for  instance, 
has  a  greater  density  of  population  than  California,  but  a 
smaller  urban  population. 

The  industrial  revolution  during  the  nineteenth  century  and 
the  changes  in  transportation  and  commerce  by  which  it  has 
been  attended  are  chiefly  responsible  for  the  drift  of  popula- 
tion to  the  cities.  In  1790  3.14  per  cent  of  the  American  people 
lived  in  cities  of  10,000  and  more;  a  century  later  the  seven 
colonies  of  Australasia  with  almost  precisely  the  same  popula- 
tion as  the  United  States  of  a  century  earlier  had  33.20  per 
cent  living  in  such  cities.  In  1790  3.40  per  cent  of  the  popu- 
lation of  the  United  States  lived  in  cities  of  over  8,000;  in 
1900  this  proportion  had  grown  to  33.1  per  cent.  In  several 
states  it  is  far  higher.  Taking  the  states  whose  urban  concen- 
tration largely  exceeds  that  of  the  average  for  the  entire  coun- 
try, the  percentage  living  in  cities  was  in  1910  as  follows: 


In  Cities  Over 

25,000 

10,000         5,000 

2,500 

Rhode  Island  .... 

67.8 

80.7 

92.5 

96.8 

Massachusetts 

64.1 

77-5 

87.7 

92.9 

Connecticut     .... 

48.S 

67-5 

79-4 

89.7 

New  York 

67.S 

72-3 

74.1 

76.9 

New  Jersey      .... 

53-8 

645 

70.1 

75-2 

United  States 

3I-I 

37-2 

41.9 

46.4 

NUMBER  OF  INHABITANTS  TO  THE  SQUARE  MILE, 
BY  STATES  AND  TERRITORIES,  1910. 

NOTK:This  (liayram  does  not  include  the  District  of  Columbia,  whicbjiad 
5,518  inhabitants  to  the  square  mile  in  1910. 
3      25     BO    75  100  125  150  175  200  225  250  276300  325  350375  400  425450475  500  525  560  575 


RHODE  ISLAND 

MASSACHUSETTS 

NEW   JERSEY 

CONNECTICUT 

NEW  YORK 

PENNSYLVANIA 

MARYLAND 

OHIO 

DELAWARE 

ILLINOIS 

INDIANA 

|<ENTUCKY 

TENNESSEE 

/IRGINIA 

WEST  VIRGINIA 

J.CAROLINA 

vllCHIGAN 

MEW  HAMPSHIRE 

MISSOURI 

J.CAROLINA 

JEORGIA 

ALABAMA 

VISCONSIN 

OWA 

'ERMONT 

MISSISSIPPI 

.OUISIANA 

^BKANSAS 

HAWAII 

MINNESOTA 

MAINE 

)KLAHOMA 

ANSAS 
VASHINGTON 

EXAS 
lEBRASKA 

AUFORNIA 

LORIDA 

. DAKOTA 

. DAKOTA 

OLORADO 

iREGON 

TAH 

)AHO 

ONTANA 

EW  MEXICO 

RIZONA 

'YOMING 

EVA  DA 

LASKA 


§  22]  Concentration  of  Population  53 

As  we  see,  in  a  few  states  the  urban  concentration  even 
exceeds  that  of  England  and  Wales,  which  amounted  in  1901  to 
68  per  cent  in  towns  over  10,000  and  to  77  per  cent  in  towns 
over  3,000.  Only  Belgium  and  Holland  exceed  the  general 
average  for  the  United  States,  while  that  of  Germany  is  about 
the  same,  and  that  of  France  somewhat  less. 

Within  the  cities  themselves  the  concentration  differs  in 
various  quarters  in  almost  as  marked  a  degree  as  it  does  in  the 
different  parts  of  a  country.  The  business  sections  have 
chiefly  a  day  population,  the  fine  residential  quarters  a  com- 
paratively low  density,  the  crowded  slums  an  exceedingly 
high  concentration.  Although  the  recent  application  of  elec- 
tricity to  transportation  has  enormously  extended  the  suburban 
area,  there  are  still  sections  where  the  congestion  in  the  centres 
increases  from  year  to  year,  seemingly  unaffected  by  rapid 
transit.  In  the  tenth  ward  of  New  York,  for  instance  —  the 
most  densely  populated  area  of  the  civilized  world  —  the 
numbers  per  acre  which  amounted  to  524  in  1890  rose  to  627 
in  1914;  while  according  to  the  census  made  by  the  Conges- 
tion Exhibit  in  1908  eleven  blocks  had  a  density  of  over  1,200. 
Compared  with  these,  the  highest  European  figures  seem  in- 
significant: Josefstadt  in  Prague,  485;  Bonnenouvelle  in  Paris, 
434;    Bethnal  Green  North  in  London,  365. 

When  we  reflect  that  in  the  United  States  over  a  third,  and 
in  several  states  two-thirds  or  three-fourths,  of  the  people  now 
live  in  cities  of  over  10,000,  and  when  we  notice  that  the  pro- 
gress of  agglomeration  is  unabated,  it  is  apparent  that  as  a  result 
of  the  changing  economic  conditions  the  problems  of  the  national 
life  of  the  future  are  to  be  in  great  measure  city  problems. 
These,  however,  are  largely  social  and  political.  So  far  as 
they  are  economic  in  character  they  fall  principally  under 
such  heads  as  the  influence  of  city  rents  on  the  cost  of  living 
and  rate  of  wages,  the  effects  of  concentration  of  labor  and 
capital  on  production  and  distribution,  and  the  consequences 
of  urban  growth  upon  depopulation  of  the  rural  districts  and 


54  Population  [§  23 

the   scarcity  of   farm  labor.     Some   of   these  will    be  discussed 

later. 

23.    Distribution  of  Population 

The  other  facts  of  distribution  of  population  which  have 
important  economic  bearings  are  those  of  sex,  age  and  occupa- 
tion. The  percentage  of  females  affects  the  labor  market  to 
the  extent  that  women  are  wage-earners,  while  a  considerable 
predominance  of  either  sex  not  only  influences  marriage  and 
fecundity  but  exerts  an  effect  on  social  life  in  general.  Under 
normal  conditions  in  modern  times  there  is  a  slight  excess  of 
females,  in  Europe  about  1,064  females  to  1,000  males.  Al- 
though the  birth  rate  of  males  exceeds  that  of  females,  there 
is  generally  a  greater  mortality  among  males,  due  in  part  to 
their  more  dangerous  occupation,  in  part  to  their  more  un- 
regulated life.  In  less  civilized  older  countries  there  is  usually 
an  excess  of  males,  owing  in  all  probability  to  the  fact  that 
more  of  the  arduous  labor  there  falls  to  the  lot  of  the  women. 
In  new  countries  like  America  there  is  also  a  slight  excess  of 
males,  ascribable  chiefly  to  immigration,  the  percentage  in  1910 
being  51.5  males  to  48.5  females.  The  contrast  between  the 
older  and  the  newer  sections  is  marked,  Massachusetts  having 
a  slight  excess  of  females  while  Wyoming  has  only  37.3  per 
cent.  That  the  causes  affecting  distribution  by  sex  are  largely 
economic  is  shown  by  the  fact  that  in  industrial  and  commer- 
cial centres,  whether  American  or  foreign,  where  the  hard  work 
and  nervous  strain  fall  chiefly  on  the  men,  the  preponderance 
of  females  is  always  accentuated. 

Distribution  by  age  has  important  social  and  political  as- 
pects, especially  as  affecting  the  school,  the  voting  and  the  mili- 
tary population. 1  For  economic  purposes,  however,  the  chief 
classification    is    that    of    the    working    population.     Although 

^  Of  the  92  millions  in  the  United  States  in  1910,  28  millions,  male 
and  female,  were  of  the  school  age  (between  6  and  20),  27  millions 
male,  of  the  voting  age  (over  21),  and  20  millions,  male,  of  the  militia 
age  (18-44). 


§  23]  Distribution  of  Population 


5S 


the  proportions  of  the  productive  classes  vary  considerably 
according  to  the  conditions  of  child  labor,  the  commonly  ac- 
cepted limits  are  15  and  65  years  respectively.     As  has  often 


POPULATION  ACCORDING  TO  AGE   DISTRIBUTION^ 


OLD        J 
PEOPLE    ^ 


ADULTS     "N 


,' 

\ 

'      /' 
/' 

V' 

/ 

/I 

/    1 

/ 

\  \ 

\\ 

/    / 

<^ 

4^ 

\'i 

/ 
/ 

/ 

\ 

\ 

> 

\^ 

/ 

ii 

ico 

*^ 

/  ^1 

1 

1 
1 

\ 

,v     N 

/ 

1 

yiALES 

FE 

VIALES 

'    V 

\ 

y 

^\ 

AGE 
100 
90 
80 
70 
60 
50 
40 
30 
20 
10 


Number  living  §  §§§§°§§§oS 

in  each       «»-*COW.r-t  T-ie«eO'a««a 

generation. ' 

Triangle  X  X  represents  an  imaKinary  population  completely  stationary,  increasing 
annually  by  a  constant  number  of  births  and  decreasinR  by  an  equal  number  of  deaths 
distributed  in  a  precisely  equal  degree  among  the  various  age  groui)s. 

Figure  A  A  represents  a  population  about  stationary,  with  a  low  birth  rate,  a  low 
death  rate  and  with  little  immigration  or  emigration. 

Figure  B  B  represents  a  population  with  a  high  birth  rate,  a  high  death  rate  and  much 
emigration. 

American  conditions  would  be  represented  by  a  combination  of  the  upper  part  of  A 
and  the  lower  part  of  B,  making  the  curve  look  like  a  top. 

been  pointed  out  and  as  is  illustrated  by  the  chart  above,  the 
distribution  by  age  may  normally  be  compared  to  a  pyramid, 


'  From  Levasseur,  La  Populalion  Franqaisc,  Vol.  II  (1891),  pp.  257- 


260. 


56 


Population 


[§24 


with  the  infants  at  the  bottom  and  the  aged  at  the  top.  Where 
population  increases  rapidly,  the  base  is  broad;  where  it  in- 
creases slowly,  the  base  is  narrow  and  the  upper  part  of  the 
pyramid,  representing  the  older  classes,  bulges  out,  making  it 
bell-shaped.  Similar  results  are  caused  by  migratory  move- 
ments. In  the  case  of  a  large  immigration  the  middle-age  classes 
expand  and  the  curve  may  be  compared  to  a  top;  in  the  case 
of  emigration  the  curve  sinks  in  the  middle  and  looks  like  a 
spindle.  It  is  owing  chiefly  to  this  fact  that  in  the  industrial 
states  as  well  as  in  the  urban  centres,  the  curve  is  like  a  top, 
that  is,  with  the  largest  proportion  of  productive  classes.  The 
difference  between  industrial  and  non-industrial  states  in  1900 
is  illustrated  in  the  following  table  of  distribution  by  ages 
arranged  by  percentages: 


Years 

1-15 

15-65 

65- 

United  States 

31.10 
27. 10 
41.60 

64.87 
67.88 
55  ■  50 

4.03 
5.02 
2.90 

Massachusetts 

South  Carolina      

Massachusetts  had  almost  ten  per  cent  more  of  the  productive 
classes  than  South  Dakota.  A  similar  lesson  is  enforced  by 
foreign  statistics. 

Distribution  by  occupation  naturally  follows  very  closely  the 
utilization  of  the  economic  resources.  Comparative  statistics 
of  different  countries  would  therefore  be  meaningless.  In  the 
United  States  the  tables  on  page  57  show  the  great  increase  in 
the  industrial  classes,  and  throw  an  interesting  light  on  the 
relative  importance  of  the  various  industries  from  the  point  of 
view  of  distribution  of  the  population. 


24.  Inqrease  of  Population 

The   increase   of  population   is   normally   dependent   on   the 
existence  of  marriage.     To  the  children  born  in  wedlock  must 


§24] 


Increase  of  Population 


^1 


however  be  added  the  illegitimate  births,  which  form  in  dif- 
ferent countries  from  3  to  14  per  cent  of  the  whole.  In  some 
large  cities  like  Paris  the  percentage  is  as  high  as  24,  and  where, 


PERCENTAGE  OF  DISTRIBUTION  OF  POPULATION  IN 
THE  UNITED  STATES  BY  OCCUPATIONS 


1880 

i8qo 

I  goo 

1910 

Agricultural  pursuits 

Professional  service 

Domestic  and  personal  service      .    .    . 

Trade  and  transportation 

Manufacturing  and  mechanical    .    .    . 

44-3 
3-5 
19.7 
IO-.7 
21.8 

37-7 
4.1 
18.6 
14.6 
-5 

35-7 

4-3 

19.2 

16.4 

24.4 

32.9 
4.8 
14.0 
199 
28.3 

NUMBER  OF  PERSONS  ENGAGED  IN  VARIOUS 
OCCUPATIONS  IN  1910 

Carpenters   817,120 

Coal  miners 613,924 

Railroad  laborers       570,975 

Laundresses  (not  in  laundries)       520,004 

Machinists,  millwrights  and  toolmakers 488,049 

Dressmakers  and  seamstresses 449,342 

Draymen,  teamsters  and  expressmen 408,469 

Iron  and  steel  workers 368,313 

Painters,  glaziers  and  varnishers 337^355 

Stenographers  and  t\^pewriters      316,693 

Sewers  and  sewing  machine  operators      291,209 

Saw  and  planing  mill  employees 260,142 

Blacksmiths,  forgemen  and  hammermen      240,519 

Stationery  engineers 231,041 

Tailors  and  tailoresses 204,608 

Weavers 203,718 

Tobacco  and  cigar  operatives 151,519 

as  formerly  in  Bavaria,  especially  severe  marriage  laws  exist, 
the  percentage  is  even  higher.  The  proportion  of  single  persons 
over  15  years  varies  from  30  to  50  per  cent  in  diflferent  countries, 
the  percentage  in  America  being  40  for  men  and  31  for  women. 
If,  however,  we  more  properly  take  the  people  between  40  and 
60  years  as  the  class  that  one  would  usually  expect  to  see  mar- 


58  Population  [§  24 

ried,  we  find  that  the  single  persons  constitute  only  12  to  15 
per  cent  of  the  whole.  In  the  American  cities  the  proportion 
of  single  persons  is  larger,  owing  partly  to  the  postponement 
of  marriage  and  partly  to  the  large  immigration  of  young  un- 
married persons.  The  normal  marriage  rate  in  most  countries 
varies  from  14  to  18  married  persons  annually  for  each  thousand 
of  the  population,  with  considerable  variations  due  to  general 
economic  conditions.  Periods  of  depression,  for  instance, 
naturally  diminish  the  pre-disposition  to  marriage,  while  on  the 
other  hand  when  the  conditions  for  the  employment  of  women 
are  favorable,  as  in  some  of  the  New  England  towns,  the  mar- 
riage rate  is  exceptionally  high. 

Of  almost  more  importance  than  the  frequency  of  marriage 
is  its  fecundity.  When  we  compare  the  number  of  births  with 
the  population  as  a  whole,  we  speak  of  a  crude  birth  rate;  when 
we  compare  the  births  with  the  number  of  women  of  child- 
bearing  age  (15  to  50  years),  we  speak  of  a  refined  or  corrected 
birth  rate.  The  average  number  of  children  to  a  family  varies 
in  different  countries  from  3  to  5.  In  the  same  country  the 
fruitfulness  depends  not  only  on  color  and  nationality,  as  in 
the  United  States,  but  also  on  social  and  economic  conditions, 
according  to  the  sway  of  prudential  considerations.  It  is  a 
notorious  fact  that  the  greatest  fecundity  is  found  in  the  poorer 
classes.  It  is  now  also  well  established  that  birth  rates,  like 
marriages,  differ  at  present  in  cities  of  the  same  size  according 
to  the  prevailing  industry  or  occupation.  The  birth  rate  per 
thousand  of  the  population  as  a  whole  ranges  from  the  excep- 
tionally low  figure  of  21  in  some  of  the  New  England  states  to 
almost  50  in  Russia  and  India.  In  the  United  States  it  was 
about  35  in  iqoo,  but  it  is  falling  rapidly  in  the  Eastern  states. 
In  19 1 5  the  birth  rates  in  Maine  and  Vermont  were  21.1  and 
21.6  respectively,  even  lower  than  in  France,  where  it  was  22 
just  before  the  war.  In  New  York  the  birth  rate  was  only  24, 
and  even  in  Minnesota  it  was  only  24.5. 

The  increase  of  population  depends,   as  has  just    been   inti- 


§  24]  Increase  of  Population  (J9 

mated,  not  only  upon  the  birth  rate  but  upon  the  death  rate 
It  makes  a  great  difference  to  social  progress  whether  a  slow 
increase  of  numbers  is  due  to  the  one  or  to  the  other  cause. 
Whatever  may  be  the  conclusion  as  to  the  desirability  of  a  low 
birth  rate,  there  can  be  only  one  opinion  as  to  the  undesira- 
bility  of  a  high  death  rate.  In  modern  times,  at  least,  civili- 
zation endeavors  in  every  way  to  arrest  mortality  and  to  pro- 
long human  life. 

It  is  quite  unnecessary  to  fortify  by  statistical  data  the  fam- 
iliar fact  that  deaths  vary  according  to  seasons,  age  and  sex. 
In  hot  countries  the  summer,  and  in  cold  countries  the  winter, 
are  the  most  dangerous;  in  all  places  infant  mortality  is  by 
far  the  greatest;  and  almost  everywhere  the  male  death  rate 
slightly  exceeds  the  female.  In  making  comparisons  we  must 
again  observe  the  distinction  between  the  crude  and  the  refined 
rate.  The  ordinary  basis  is  the  number  of  deaths  per  thousand 
of  the  population.  Since,  however,  the  rate  varies  with  sex 
and  age,  the  comparison  is  accurate  only  when  made  as  be- 
tween the  same  proportions  of  sex  and  age.  A  rate  reduced 
to  such  proportions  is  called  the  refined  or  corrected  death 
rate.  Otherwise  a  country  with  a  relatively  larger  number  of 
children  would  have  a  higher  death  rate.  For  general  purposes, 
however,  it  has  been  found  that  the  results  of  computing  ac- 
cording to  the  crude  or  to  the  refined  death-rate  method  do 
not  differ  sufficiently  to  change  the  relative  standing  of  coun- 
tries. In  the  American  statistics  still  further  accuracy  is  sought 
by  correcting  the  death  rate  for  race  as  well  as  age  distribution. 
Using  the  crude  figures,  the  normal  death  rate  in  modern  com- 
munities now  varies  from  14  to  21  per  thousand,  the  former 
being  the  figure  for  the  United  States  in  1916.  In  the  cities  it 
is  considerably  higher  than  in  the  country,  the  rural  rate  some- 
times being  as  low  as  8  or  g,  and  the  urban  rate  occasionally 
ascending  in  unhealthy  American  cities  to '35  or  even  40.  The 
death  rate  has  been  markedly  reduced  in  recent  times  by  the 
progress  of  science  in  controlling  disease,  by  the  growing  infre- 


6o  Population  [§  25 

quency  of  war,  and  by  the  economic  changes  which  have  vir- 
tually eliminated  famine,  except  in  relatively  backward  countries 
like  Russia  and  India.  The  greatest  improvement,  however,  has 
taken  place  in  the  urban  death  rate,  owing  to  the  immense  strides 
in  modern  sanitation,  food  and  milk  inspection,  housing  improve- 
ment and  park  development.  Within  a  century  the  death  rate 
of  Vienna  has  fallen  from  60  to  16;  within  twenty-five  years  that 
of  London  from  50  to  13;  and  within  half  a  century  that  of  New 
York  from  32  to  14.  In  fact,  selected  cities  in  certain  countries 
now  show  a  death  rate  even  lower  than  in  rural  districts. 

25.   Migration  of  Population 

The  final  factor  which  affects  changes  in  the  population  is 
migration.  Internal  migration  from  place  to  place  as  well  as 
from  occupation  to  occupation  is  the  chief  manifestation  of 
the  modern  mobility  of  labor.  In  former  times,  custom,  caste, 
settlement  laws  and  the  like  interposed  serious  obstacles  to 
such  movement.  Now,  under  the  pressure  of  the  economic 
motive,  population  shifts  with  opportunities  of  bettering  one's 
condition.  Migration  between  countries  assumes  the  form  of 
emigration  and  immigration.  While  immigration  swells  the 
population  of  new  countries,  emigration  only  rarely  diminishes 
the  population  of  an  old  country;  for  the  gap  caused  by  the 
emigrants  is  soon  filled  by  the  results  of  an  increased  birth 
rate  due  to  the  improved  opportunities  at  home.  Ireland  is 
for  special  reasons  a  striking  exception. 

Where  people  emigrate  to  places  under  the  control  of  the 
mother  country  they  form  colonies.  Colonies,  however,  are 
not  only  colonies  of  occupation,  to  afford  an  outlet  for  surplus 
population,  but  also  colonies  of  exploitation,  to  furnish  a  vent 
for  surplus  production  of  commodities.  In  modern  times  we 
may  even  speak  of  a  third  kind  of  colonies  like  those  of  the 
United  States,  where  the  aim  is  neither  emigration  nor  exploi- 
tation, but  rather  the  political  and  economic  elevation  of  the 
indigenous  population. 


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FOREIGN  IMMIGRATION   TO  THE  UNITED  STATES 
1840-1920 

NUMBER  OF  IMMIGRANTS. 

(  To  year  ending  Dec,  31,  1  855  figures  show  alien  passengers  arrived; 
after  year  ending  Dec.  31,   1855,  innmigrants  arrived.) 

NET  IMMIGRATION 

after  deducting  alien  Haparturpg                     _.^.___ 

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§  25]  Migration  of  Population  61 

If  wc  assume  with  the  anthropologists  one  original  habitat 
for  the  human  race,  practically  all  populations  are  composed 
of  immigrants  or  descendants  of  immigrants.  Formerly  the 
migration  was  one  of  tribes  or  nations;  now  it  is  one  of  individ- 
uals. In  the  older  civilizations  these  wholesale  immigrations 
even  of  individuals  have  long  since  ceased.  In  countries  like 
the  United  States,  however,  the  movement  is  still  in  progress 
on  a  gigantic  scale,  probably  for  the  last  time  in  human  history. 
Although  the  immigration  has  increased  largely  for  the  past 
half-century,  it  has  not  grown  appreciably  faster  than  the  native 
population.  The  foreign  born  constituted  13.2  per  cent  of  the 
total  population  in  i860;  and  while  the  proportion  rose  slightly 
in  the  succeeding  decade,  in  1900  it  was  again  13.7  and  in  iqio 
14.5  per  cent.  This  is  contrary  to  the  current  opinion,  but  is 
none  the  less  a  fact.  It  is  clearly  shown  on  the  maps  and  charts 
following  pages  60,  62  and  64,  which  also  illustrate  the  great 
increase  in  recent  years  of  immigrants  from  the  South  and  East 
of  Europe  as  well  as  the  composition  of  the  population  in  1910. 

By  combining  the  natural  increase  with  that  due  to  migra- 
tion we  arrive  at  the  total  increase  of  population.  Up  to  the 
civil  war  the  population  of  the  United  States  grew  slightly 
more  than  a  third  every  ten  years.  Since  1880  the  decennial 
rate  of  increase  has  diminished,  being  about  25  per  cent  for  the 
decade  ending  1890,  and  21  per  cent  for  those  ending  1900  and 
1910.  Notwithstanding  this  diminution  in  the  rate  of  increase, 
it  is  exceeded  only  by  Argentina,  where  the  rate  is  approximately 
as  large  as  that  of  America  before  i860.  In  Europe  the  rate  of 
increase  is  only  about  one-half  of  that  of  the  United  States; 
but  while  it  is  falling  in  the  United  States  it  is  rising  in  Europe. 
On  the  chait  opposite  page  61  will  be  found  a  statement  of  the 
comparative  increase  of  population  in  some  of  the  more 
important  countries  during  recent  decades. 

The  excess  of  births  over  deaths  and  the  rate  of  increase  in 
a  few  typical  countries  for  1900  are  given  in  the  table  on  the 
following  page. 


62 


Population 


[§  26 


26.   The  La^v  of  Population 

The  chief  problem  in  the  increase  of  population  is  its  rela- 
tion to  prosperity.  The  so-called  law  of  population,  as  framed 
by  Malthus  at  the  close  of  the  eighteenth  century,  asserts  that 
there  is  a  tendency  of  population  to  increase  faster  than  the 
means  of  subsistence,  and  that  this  pressure  of  population  on 
food,  unless  removed  by  preventive  agencies,  will  lead  to  the 
positive  checks  of  misery,  vice  and  crime,  by  which  alone  the 


United  States   .    .    . 
England  and  Wales 

Germany 

France  

Italy 

Hungary 


Birth 

Death 

Excess  of 

Rate. 

Rate. 

Births. 

SS--!^ 

17.4 

17.7 

30.1 

18.4 

II. 7 

36.2 

22.5 

13-7 

22.2 

21.6 

0.6 

35-5 

24.6 

10.9 

40.5 

30-3 

10.2 

Per  cent  of 
Decennial 
Increase. 


20.7 
12. 1 
16.2 

1-7 

7.2 

10.3 


Populat  ion 

(omitting 

000). 


75,994 
32,526 
56,367 
38,590 
32,475 
19,254 


equilibrium  will  again  be  restored.  Three  conclusions  were 
drawn  from  this  doctrine,  applicable  respectively  to  socialism, 
to  wages  and  to  economic  progress. 

(i)  The  first  point  is  the  one  which  originally  set  Malthus 
thinking.  Some  of  the  French  idealists  and  their  English 
followers  had  been  advocating  equalitarian  or  communistic 
schemes  of  social  regeneration.  Malthus  contended  that  the 
pressure  of  population  on  subsistence  would  efTectually  pre- 
clude any  such  ideal  consummation.  (2)  Again,  although 
this  came  somewhat  later,  it  was  claimed  that  wages  depend 
upon  demand  and  supply,  and  that  it  was  therefore  hopeless 
for  the  laborers  to  expect  more  than  a  bare  minimum  wage 
unless  their  numbers  were  checked.  (3)  Finally,  it  was  asserted 
that  economic  progress  in  general  was  seriously  menaced  by 
the  danger  of  over-population,  and  it  was  contended  that  this 
could  be  averted  only  by  the  extensive  apphcation  of  prudence 


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§  26]  Law  of  Population  63 

and  self-restraint,  —  remedies  in  the  efficacy  of  which  Malthus 
himself  had  not  much  confidence. 

In  the  original  framing  of  the  principle,  Malthus  maintained 
that  the  ratio  of  increase  was  at  best  arithmetical  in  the  case  of 
food,  but  geometrical  in  the  case  of  population.  While  the 
accuracy  of  these  ratios  has  been  successfully  disputed,  it  still 
remains  a  question  as  to  whether  population  really  tends  to 
increase  faster  than  food.  So  far  as  food  is  concerned,  there 
is  no  doubt  that  there  are  definite  limits  to  its  increase,  even 
though  these  limits  are  more  elastic  than  were  originally 
thought.  The  area  of  cultivation  may  be  extended,  improve- 
ments of  all  kinds  may  be  applied,  hitherto  unsuspected  forces 
of  nature  may  be  utilized;  but  in  the  end,  as  we  shall  see,  the 
law  of  diminishing  returns,  which  was  not  at  first  thought  of  by 
Malthus,  will  make  itself  felt. 

With  reference  to  population,  however,  two  considerations 
have  been  advanced  to  ofTset  the  contentions  of  Malthus, — 
the  biological  and  the  socio-economic  arguments.  The  bio- 
logical argument  asserts  that  the  power  of  reproduction  itself 
diminishes  with  more  complex  and  civilized  beings,  and  points 
to  the  small  families  of  the  higher  classes  and  to  the  increasing 
sterility  of  the  New  England  women.  This  argument,  however, 
is  by  no  means  indisputable;  and  it  is  above  all  uncertain 
whether  the  diminishing  ratio  is  natural  or  artificial,  —  that  is, 
whether  or  not  it  is  a  result  of  volition.  The  socio-economic 
argument  claims  that,  as  a  consequence  of  general  social  as 
well  as  economic  reasons,  the  size  of  families  varies  inversely 
with  wealth,  and  thus  keeps  down  the  ratio  of  increase.  With 
the  poorest  classes  every  child  is  regarded  as  a  prospective 
bread-winner,  and  to  that  extent  not  only  a  help  in  the  near 
future  but  an  additional  support  for  old  age.  This  leads  to 
early  and  often  improvident  marriages  and  large  families.  In 
the  next  stratum  of  society  the  demands  of  education  and  of 
the  maintenance  of  a  social  position  induce  more  deliberation 
in  marriage,  and  effectively  bar  the  i)robability  of  so  numerous 


64  Population  [§  26 

a  progeny.  Finally,  where  wealth  is  abundant,  the  desire  care- 
fully to  train  a  few  rather  than  to  half  train  many  children,  as 
well  as  the  wish  to  escape  the  nervous  strain  of  a  numerous 
offspring,  conspire  to  restrict  the  number  of  children.  The 
French  peasant  is  not  so  different  from  the  average  American 
or  European  resident  of  a  large  city.  The  economic  motive 
may  be  slightly  stronger  with  the  former,  the  other  social 
motives  slightly  stronger  with  the  latter;  but  in  essence  they 
are  alike.  Here  again,  however,  the  argument  is  not  anti- 
Malthusian;  for  the  phenomena  just  described  are  the  results 
of  prudential  considerations,  and  really  fall  under  the  head  of 
the  preventive  agencies  mentioned  by  Malthus. 

It  might  seem,  then,  that  Malthus  was  right  in  his  premises; 
and  since  the  preventive  considerations  are  proverbially  weak 
in  the  poorer  classes,  it  might  be  claimed  that  he  was  also  jus- 
tified in  his  gloomy  forebodings.  This  conclusion,  however, 
does  not  follow.  The  real  antithesis  is  proximately  at  least 
not  between  population  and  food,  but  between  population  and 
wealth,  or  productive  efficiency.  Through  a  proper  organiza- 
tion and  utilization  of  improved  methods,  production  of  wealth 
in  general  may  be  so  augmented  as  to  permit  an  increase  both 
in  population  and  in  prosperity.  This  has  happened,  for  in- 
stance, all  through  the  nineteenth  century,  even  in  the  older 
countries  of  Europe;  the  industrial  revolution  has  not  only 
multiplied  national  wealth,  but  has  greatly  increased  popula- 
tion, while  reducing  misery,  vice  and  crime.  It  might  be  con- 
tended, indeed,  that  this  is  exceptional,  because  the  increased 
numbers  have  after  all  been  dependent  ultimately  upon  the  food 
supply  which  they  have  secured  from  the  newly  opened  areas 
of  North  and  South  America;  and  it  might  be  added  that  the 
population  of  these  countries  is  increasing  so  rapidly  that  sooner 
or  later  they  also  will  have  no  surplus  food  to  export.  Even 
granting  this  contention,  however,  and  looking  forward  to  the 
distant  time  when  all  the  huge  and  now  uncultivated  areas  of 
the  earth's  surface  will  be  utilized  for  food  production,  it  stUl 


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§  26]  Law  of  Population  65 

remains  true  that  the  increase  of  wealth  may  for  almost  indef- 
inite periods  keep  ahead  of  population.  For,  as  was  intimated 
in  the  last  chapter,  a  really  intensive  capitalistic  system  of  agri- 
cultural production  has  never  yet  been  attempted  on  a  large 
scale.  If  there  is  enough  wealth  to  put  into  the  soil,  it  can  be 
transmuted  into  food.  The  diminishing  returns  from  land  can 
be  arrested  by  the  increasing  returns  of  a  rapidly  augmenting 
efficiency  of  industry  in  general.  The  food  may  indeed  cost 
more,  but  there  will  be  more  wealth  with  which  to  buy  it. 

Not  only  can  wealth  be  made  to  increase  faster,  but,  as  we 
have  seen,  the  increase  of  wealth  will  in  itself  set  in  motion  those 
economic  and  sociological  forces  which  tend  to  reduce  the  rate 
of  increase  of  population.  Thus  from  both  sides  the  antithesis 
of  wealth  and  population  may  be  weakened.  Under  favorable 
conditions  population  may  increase  gradually,  and  wealth 
rapidly. 

It  is  clear,  however,  that  these  favorable  conditions  include 
those  of  distribution  as  well  as  production.  The  communists 
against  whom  Malthus  wrote  were  mistaken,  but  not  for  the 
reason  alleged  by  him.  They  thought  that  a  mere  change  in 
the  distribution  of  wealth  would  suffice  to  bring  prosperity. 
They  failed,  just  as  the  socialists  of  to-day  still  fail,  to  realize 
that  even  an  ideal  distribution  is  valueless  without  enough  to 
divide,  and  that  their  schemes  would  dangerously  impair  pro- 
ductive efficiency.  On  the  other  hand,  the  wages-fund  doc- 
trine of  the  English  classical  economists  erred,  as  we  shall  learn, 
chiefly  in  that  it  overlooked  the  connection  between  wages  and 
production,  and  took  no  account  of  the  fact  that,  given  a 
greater  productive  efficiency,  more  workmen  and  higher  wages 
are   perfectly   compatible. 

The  problem  of  population  as  a  whole  is,  then,  not  one  of 
mere  size,  but  of  efficient  production  and  equitable  distribution. 
That  is,  it  is  a  problem  not  of  numbers  alone  but  of  wealth. 
Since  man  is  the  chief  labor  force,  large  numbers  indeed,  other 
things  being  equal,  mean  greater  national  strength  and  power. 
5 


66  Population  [§  26 

But  the  reverse  may  be  true  if  other  things  are  not  equal.  A 
small  nation  with  greater  productive  efficiency,  like  England, 
will  outrank  a  more  populous  country,  like  India.  Smaller 
numbers  with  a  fairly  equable  distribution  of  wealth  are  prefer- 
able to  a  dense  population  living  in  the  extremes  of  misery  and 
opulence.  Mere  numbers  are  therefore  not  the  vital  point. 
The  world  has  alternated  in  its  opinion  and  action.  In  classic 
antiquity,  where  the  absence  of  advanced  industrial  methods 
soon  set  a  limit  to  production,  over-population  was  a  real  danger, 
tempered  first  by  emigration  and  then  by  infanticide.  In  the 
middle  ages  population  was  sparse,  and  yet,  because  of  unde- 
veloped production,  kept  down  by  famine  and  disease.  With 
the  growth  of  enterprise  in  the  fifteenth  and  sixteenth  cen- 
turies, increase  of  population  was  favored  but  not  always  se- 
cured. The  conditions  at  the  close  of  the  eighteenth  century 
seemed  to  lend  color  to  the  fears  of  Malthus;  but  for  well-nigh 
a  century  the  concern  in  the  advanced  industrial  countries  has 
been  not  of  an  unduly  rapid  but  of  an  unduly  slow  increase  of 
population,  until  in  France  to-day  it  has  become  a  problem 
not  of  excessive  fecundity  but  of  race  suicide. 

The  doctrine  of  over-population  has  therefore  lost  its  terrors 
for  modern  society.  The  stress  has  been  shifted  from  food  to 
wealth  and  efficiency.  Productive  efficiency,  however,  depends 
not  only  upon  character  and  education,  intellectual,  industrial 
and  ethical,  but  also  upon  social  organization  and  economic 
methods.  The  problem  of  population,  in  short,  is  to-day  a 
part  of  the  broader  problem  of  the  production  and  distribution 
of  wealth.  In  this  sense  it  is  a  result  rather  than  a  cause.  If 
we  increase  productive  efficiency  and  secure  an  approach  to  dis- 
tributive justice,  population  will  adjust  itself  to  the  new  con- 
ditions either  by  increasing  automatically  up  to  the  level  of 
comfortable  subsistence  or  by  being  voluntarily  kept  down  to 
that  level. 


Book  II 
Development  of  Economic  Life  and  Thought 


CHAPTER  V 
THE  ECONOMIC  STAGES 

27.    References 

C.  Biicher,  Industrial  Evolution  (trans,  by  Wickett,  1901),  chs.  i-iii; 
R .  T.  Ely  Studies  in  the  Evolution  of  Industrial  Society  (1903),  part  I,  ch- 
iii  W  J.Ashley  English  Economic  History  {2  voh.,  i888i8gT,);E.  ]enks, 
History  of  Politics  (1900),  Types  i,  ii,  W.  Cunningham,  Growth  of  English 
Industry  (3  vols  ,  5th  ed  ,  1910-1912);  J.  A.  Hobson,  Evolution  of  Modern 
Capitalism  (3d  ed  ,  1912),  ch.  ii,  E.  J.  Simcox,  Primitive  Civilizations 
(1897)  O  F.  Peschel.  Races  of  Mankind  (1876);  F.  'RsiiztX'  History  of 
Mankind  (3  vols.,  1 896-1 898);  J.  Lubbock,  Races  of  Man  (1888);  and 
Origin  of  Civilization  (1870);  L.  H,  jSIorgan,  Ancient  Society  (1878);  A.  H. 
Keane.  Man,  Past  and  Present  (1899);  Spencer  and  Gillen,  Native  Tribes 
of  Central  Australia  (1899)  and  Northern  Tribes  of  Central  Australia 
(1904)  r  A.  W.  Howitt,  N  live  Tribes  of  South  East  A  ustralia  (1904) ;  O.  T. 
MsiSon,Origin  of  Invention  (Smithsonian  Institution,  Publications,  1895); 
P.  G.  H.  Grierson,  The  Silent  Trade  (1903);  A.  Loria,  Econotnic  Founda- 
tions of  Society  (trans,  by  Keasbey,  1899);  G.  Schmoller,  The  Mercantile 
System  (trans,  by  Ashley,  1896) ;  T.  Warner,  Landmarks  in  English  Indus- 
trial History  (1899);  E.  Lipson,  An  Introduction  to  the  Economic  History 
of  England  (1915);  L.  C.  A.  Knowles,  The  Industrial  and  Commercial 
Revolutions  in  Great  Britain  during  the  Nineteenth  Century  (1921). 

28.   Economic  Development 

Inasmuch  as  economic  life  is  many-sided,  it  is  not  easy  to 
single  out  the  fundamental  characteristics  of  its  development. 
IMost  of  the  current  explanations  err  in  one  of  three  ways:  some 
mistake  the  accident  for  the  essence;  some  are  so  incomplete 

67 


68  Economic  Stages  [§  28 

as  to  be  of  little  real  use;    some  are  so  general  as  to  be  either 
vague  or  inadequate. 

(i)  Of  the  first  class  a  good  example  is  the  division  into  the 
three  periods  of  barter,  money  and  credit  economy.  In  the  first 
period  men  exchanged  their  superfluities  through  the  medium 
of  barter  alone;  in  the  second  period  money  was  invented  to 
facilitate  trade;  in  the  third,  credit  was  devised  to  supplement 
the  money  supply.  All  this  is  true  enough,  but  does  not  go  suf- 
ficiently deep.  It  does  not  show  which  is  cause  and  which  is 
effect.  It  does  not  tell  us  why  these  transitions  occurred,  nor 
explain  the  basic  changes  in  the  industrial  organization  of  which 
these  transitions  are  only  the  outward  forms.  Of  much  the 
same  character  is  the  division  of  economic  life  into  the  three 
stages  of  the  animal,  the  vegetable  and  the  mineral  economy. 
In  the  first  period,  we  are  told,  men  lived  primarily  on  the 
results  of  the  chase;  in  the  second,  on  the  fruits  of  the  earth; 
while,  in  the  third,  science  is  continually  expanding  the  scope 
of  chemical  substitutes  for  animal  and  vegetable  food.  It  is 
obvious  that  even  if  this  statement  were  correct,  it  would  not 
make  clear  the  fundamental  facts  of  economic  organization. 

(2)  The  second  class  of  explanations  comprises  all  kinds  of 
half-truths  or  statements  which  while  true  in  themselves  are 
incomplete.  In  this  category  belong  Maine's  famous  law  that 
the  world  has  progressed  from  a  condition  of  status  to  one  of 
contract,  and  Spencer's  law  of  the  evolution  from  militant  to 
industrial  society.  Of  a  like  nature  is  the  assertion  that  the 
world  has  gone  through  the  stages  of  slavery,  serfdom  and  free 
labor;  or  that  it  has  advanced  from  common  to  private  property, 
or  from  bimetallism  to  monometallism,  or  from  custom  to  com- 
petition. All  such  statements  may  be  true  and  even  serviceable 
within  a  limited  field,  but  for  the  purpose  of  disclosing  the  real 
inwardness  of  general  economic  progress  they  are  of  minor 
importance. 

(3)  The  most  conspicuous  illustration  of  the  third  class  of 
explanations  is  the  venerable  classification  into  the  five  stages, 


§  29]  Primitive  Technique  69 

—  the  hunting,  the  pastoral,  the  agricultural,  the  commercial 
and  the  industrial  stage.  This  description,  however,  is  both 
inaccurate  and  vague.  Not  only  is  hunting  not  the  first  stage, 
but  the  sequence  of  the  stages  is  not  necessarily  the  one  men- 
tioned. Moreover,  the  generalization  is  too  broad  to  afford 
much  help  in  the  explanation  of  modern  conditions.  Rome  is 
supposed  to  have  gone  through  these  stages,  and  yet  the  later 
Roman  civilization  differed  in  fundamental  economic  respects 
from  our  own.  A  version  of  economic  history  which  would 
throw  imperial  Rome  and  modern  England  into  the  same  cate- 
gory is  manifestly  too  broad  to  be  serviceable.  Of  a  similar 
character  is  the  division  of  economic  life  into  the  stone,  the 
bronze,  the  iron  and  the  steel  age.  The  iron  age  covers  so  many 
heterogeneous  forms  of  economic  civilization  that  the  classifica- 
tion is  useful  chiefly  for  archaeological  purposes. 

Before  proceeding,  however,  to  give  the  more  modern  ex- 
planation of  economic  progress,  it  may  be  wise  to  dwell  for  a 
moment  on  the  last  two  classifications  which,  when  correctly 
put,  still  possess  a  certain  use  for  the  early  periods  of  society. 

29.   Primitive  Technique 

(i)  At  the  outset  and  for  a  long  time,  man,  like  his  simian 
ancestor,  lived  on  wild  berries,  nuts,  roots  and  herbs.  He 
roamed  about,  as  do  some  of  the  Australasians  to-day,  in  small 
groups  of  twenty  to  fifty,  in  alternating  periods  of  plenty  and 
want,  according  to  the  season  or  the  fortunes  of  the  weather. 
Each  group  was  for  the  purposes  of  the  food  supply  entirely 
independent.  Primitive  man,  however,  as  the  physical  con- 
formation of  his  teeth  and  jaws  shows,  was  not  only  herbivorous 
but  carnivorous.  When  geographical  reasons  favored,  he  varied 
his  diet  by  fishing,  and  in  many  cases  he  practised  cannibalism, 
not  only  on  his  enemies,  but  also  on  the  old  and  useless  mem- 
bers of  his  own  social  group. 

(2)  The  root-grubbing  period  was,  we  shall  not  say  suc- 
ceeded,   but    rather   supplemented,    by    the    hunting    stage   in 


yo  Economic  Stages  [§  29 

certain  portions  of  the  world  where  game  was  abundant.  This, 
however,  presupposes  a  certain  technical  development.  Man 
is  distinguished  from  his  prey  primarily  by  the  use  of  weapons 
and  tools.  The  history  of  civilization  is  very  largely  the  his- 
tory of  technique.  There  was  at  first  no  distinction  between 
weapons  and  tools.  The  weapon  was  the  only  tool  for  both 
defence  and  offence.  The  earHest  weapons  consisted  of  objects 
ready  at  hand,  —  wooden  sticks,  animal  bones,  tusks  and  teeth, 
pieces  of  stone. 

(3)  The  combination  of  these  was  one  of  the  great  steps  in 
advance.  It  changed  the  primitive  club  or  missile  into  a  mod- 
erately effective  weapon.  The  affixing  of  a  flint  to  a  stick, 
or  the  fastening  of  jagged  teeth  to  pieces  of  wood  by  wisps  of 
grass  or  strips  of  hide  or  catgut  were  the  first  triumph  of  human 
ingenuity.  The  bone  and  the  stone  age  lasted  for  countless 
generations.  In  the  course  of  time  implements  were  found 
serviceable  not  only  for  warfare  but  for  the  saving  of  toil;  in 
other  words,  by  the  side  of  the  weapon  we  find  the  tool.  In  this 
transition  perhaps  the  mightiest  factor  was  the  utilization  of 
fire.  What  was  a  terror  to  brute  creation  became  a  servant 
to  man.  Originally  obtained  from  a  chance  conflagration, 
the  spark  of  fire  was  zealously  guarded,  and  was  soon  invested 
with  sacred  attributes.  In  some  cases  it  even  became  the  basis 
of  the  religion  itself.  Although  we  find  savage  races  to-day 
who  understand  the  secret  of  creating  fire  by  friction,  the  easier 
method  was  to  ignite  the  brand  from  the  ever-burning  flame. 
The  chief  function  of  the  vestal  virgins  in  Rome  was  to  keep 
the  perpetual  fire;  and  in  the  Catholic  church  to-day  with  its 
never-extinguished  light  we  have  the  last  survival  of  what  was 
once  a  fundamental  social  custom.^ 

^  The  testimony  given  before  the  New  York  gas  commission  in  1905 
affords  another  curious  illustration  of  the  survival  of  this  custom.  One 
of  the  officials  stated  that  whenever  the  location  of  the  gas  works  is 
changed,  the  fire  is  transferred  by  a  brand  from  the  old  to  the  new 
building.     Under  no  consideration  would  a  new  fire  be  started. 


§  29]  Primitive  Technique  yi 

(4)  Fire  was  utilized  not  oiilj^  for  purposes  of  warmth,  buL 
also  for  the  better  preparation  and  conservation  of  food,  thus 
making  man  less  dependent  on  his  immediate  surroundings. 
From  that  time  on,  although  environment  still  makes  the  man, 
man  to  an  ever-increasing  degree  succeeds  in  changing  the 
environment.  The  most  signal  service  of  fire,  however,  was 
in  the  improvement  of  tools.  Its  uses  became  most  marked 
when  metals  were  employed.  Even  the  tools  of  wood  and 
stone,  however,  were  greatly  improved  thereby.  So  slow  was 
the  development  that  it  took  countless  centuries  for  the  old 
stone  or  palasolithic  age  to  change  into  the  new  stone  or  neo- 
lithic age.  We  find  flint  weapons  at  least  100,000  years  old. 
During  this  transition  man  had  learned  to  rub,  to  sharpen,  to 
bore,  to  cut,  to  plane  and  to  polish  the  bones  and  stones  so  as 
to  produce  arrows,  knives,  javelins,  hammers,  millstones, 
daggers  and  saws.  In  all  this  he  was  simply  imitating  the  ex- 
perience of  parts  of  his  own  body:  in  the  saw  we  have  the 
improved  tooth,  in  the  hammer  the  strengthened  fist,  in  the 
scoop  the  enlarged  hollow  of  the  hand,  in  the  hook  the  crooked 
finger,  in  the  javelin  the  lengthened  arm,  in  the  knife  the 
sharpened  nail.  Hand  in  hand  with  this  went  the  invention 
of  the  earliest  utensils.  From  the  animal's  horn  to  the  beaker, 
from  the  hoUowed  wood  to  the  osier  basket,  from  the  natural 
gourd  to  the  artificial  jug,  does  not  seem  so  great  a  step. 
Yet  the  invention  of  pottery  has  been  deemed  by  some  so  im- 
portant as  to  constitute  a  revolution  in  human  civilization. 
Weapons,  tools,  utensils,  —  these  typify  the  onward  march 
of  the  human  race;  they  are  the  outward  technical  manifesta- 
tion of  man's  intellectual  progress  and  the  physical  basis  of  his 
economic  development. 

(5)  From  the  purely  technical  point  of  view  the  stone  age 
was  succeeded  by  that  of  metal.  Without  the  use  of  fire  for 
smelting  this  would  of  course  have  been  impossible.  Archaeolo- 
gists not  so  long  ago  thought  that  the  copper  and  bronze  ages 
everywhere    preceded    that    of    iron.     This    can,    however,    be 


72  Economic  Stages  "  [§  30 

accepted  only  with  qualifications.  It  now  seems  probable 
that  the  rougher  forms  of  iron  were  utilized  before  bronze  was 
invented.  In  certain  countries  we  find  no  bronze  age  at  all, 
because  of  the  lack  of  one  or  both  of  the  constituent  compo- 
nents, tin  and  copper.  In  the  civilizations  that  grew  up  about 
the  Mediterranean,  however,  first  copper  and  then  bronze 
drove  out  the  primitive  and  rougher  iron  implements,  until 
after  several  centuries  the  improved  extractive  processes  assured 
the  final  victory  to  the  finer  iron  tools  and  thus  instituted  the 
true  iron  age.  With  the  advent  of  this,  man's  mastery  over 
nature  was  definitely  assured. 

30.   Transition  from  the  Lower  Stages  of  Civilization 

It  is  obvious  that  metallic  weapons  and  implements  would 
be  of  the  greatest  service  to  both  hunters  and  fishers,  and  in 
truth  we  find  some  of  the  more  advanced  hunting  civilizations 
acquainted  with  the  use  of  rougher  iron.  But  the  continuance 
of  the  hunting  stage,  as  well  as  the  character  of  its  transition 
to  a  subsequent  stage,  depends  not  so  much  upon  the  kind  of 
weapon  as  upon  the  conditions  of  nature  and  the  relations  of 
population  to  the  land.  Under  certain  circumstances  where 
game  began  to  become  scarce,  it  was  discovered,  at  first  by  mere 
accident,  that  a  less  precarious  food  supply  could  be  secured 
by  preserving  various  animals  and  caring  for  their  increase, 
rather  than  by  devouring  at  once  the  entire  product  of  the  chase. 
The  domestication  of  animals  was  a  discovery  of  momentous 
import,  and  with  their  multiplication  first  for  food,  then  for 
transport,  and  finally  for  clothing,  protection  and  pleasure,  we 
have  the  conditions  for  the  transition  to  the  pastoral  stage. 
Although  this  is  often  called  the  nomadic  stage  because  of  the 
perpetual  shifting  of  the  community  in  quest  of  fresh  pasture, 
the  term  is  badly  chosen,  because  there  is  on  the  whole  less 
nomadism  than  in  the  hunting  age.  The  chief  result  of  the 
domestication  of  animals  was  the  assurance  of  a  permanent, 
even  though  an  artificial,  food  supply,  or  at  all  events  one  that 


§  3o]  Transition  73 

depended  on  the  foresight  and  care  of  man.  Cannibalism  disap- 
peared and  famines  became  less  frequent.  Another  consequence 
was  the  possibility  of  supporting  a  larger  population  on  the  same 
area.  Finally,  the  permanent  possession  of  cattle  became  an  ob- 
ject of  desire,  and  private  property  developed  on  a  large  scale, 
with  corresponding  differences  of  wealth  and  of  social  classes. 

It  is,  however,  erroneous  to  assume  that  the  hunter  was  nec- 
essarily succeeded  by  the  hersdman.  In  the  first  place  animals 
capable  of  domestication  were  not  found  everywhere.  On  the 
American  continent  no  pastoral  life  was  possible  with  the  Uama 
alone.  Secondly,  whole  stretches  of  land,  both  in  Africa  and 
in  Asia,  were  unsuitable  for  grazing  purposes.  It  is  only  where 
all  the  geographical  and  climatic  conditions  were  favorable, 
as  on  the  great  Asiatic  and  North  African  plains,  that  we  find 
the  transition  to  the  pastoral  age. 

In  the  same  way  it  is  erroneous  to  think  that  the  herdsman 
was  everywhere  succeeded  by  the  farmer.  A  certain  degree 
of  agriculture  is  often  found  combined  with  the  hunting  or 
fishing  stage.  In  fact,  it  is  only  a  small  step  from  the  original 
root-grubbing  to  primitive  agriculture.  When,  again  presum- 
ably by  accident,  it  was  found  that  the  seeds  would  multiply 
themselves,  and  that  the-  stick  was  more  effective  for  grubbing 
than  the  finger,  we  have  the  beginning  of  the  cultivation  of 
the  soil.  Just  as  human  foresight  led  men  under  certain  con- 
ditions to  preserve  animals  in  order  to  secure  an  increase,  the 
same  quality  led  them  under  other  conditions  to  preserve  plants. 
If  flock  tending  is  a  result  of  the  domestication  of  wild  animals, 
agriculture  is  a  result  of  the  domestication  of  wild  plants.  Be- 
cause of  the  temporary  patch  near  the  hunter's  tent,  some,  like 
Morgan,  call  this  system  horticulture;  because  of  the  primitive 
tools,  others  call  it  hoe  culture.  Both  terms  are  unfortunate, 
the  one  because  horticulture  (i.  e.  garden  culture)  at  present 
signifies  a  very  developed  form  of  tilling  the  soil;  the  other, 
because  the  hoe  has  even  to-day  been  by  no  means  completely 
superseded  by  the  plough. 


74  Economic  Stages  [§  30 

What  is  reasonably  sure  is  that  the  primitive  tilling  of  the 
soil  was  carried  on  by  the  hunters'  wives  and  daughters  as  a 
subordinate  and  auxiliary  means  of  support.  It  was  only  at 
a  much  later  period  that  agriculture  acquired  more  importance, 
and  it  was  not  until  the  game  supply  had  been  practically  ex- 
hausted that  the  chief  reliance  was  put  on  agriculture,  a'nd  the 
roving  life  of  the  hunter  gave  way  to  the  settled  habitation  of 
the  farmer.  These  periods  in  agriculture  may  exist,  moreover, 
in  connection  not  only  with  the  hunting  stage,  but  also  with  the 
pastoral  stage.  In  fact,  the  most  careful  investigators  now 
believe  that  the  domestication  of  animals  was  not  an  achieve- 
ment of  the  hunter  at  all,  but  of  the  primitive  farmer,  and  that 
the  pastoral  life  was  an  outgrowth  of  early  agriculture.  With- 
out a  knowledge  of  all  the  details,  therefore,  it  is  impossible  to 
assert  the  exact  chronological  sequence  of  the  stages. 

Much  the  same  may  be  said  of  the  transition  to  the  later 
stages  of  commerce  and  industry.  The  commercial  stage  does 
not  necessarily  follow  the  agricultural  stage,  but  often  precedes 
it.  In  the  case  of  many  coast  peoples,  the  fishing  and  commer- 
cial stages  appear  at  the  same  time,  without  the  intervention 
of  agriculture.  And  in  more  developed  civilizations,  like  that 
of  Venice,  for  instance,  we  find  the  pastoral  stage  develop  at 
once  into  the  commercial  stage  without  reaching  the  industrial 
stage. 

The  time-honored  classification  of  economic  progress  is  thus 
not  only  inexact  in  itself,  but  of  comparatively  little  service  in 
explaining  the  great  changes  that  have  supervened  since  the 
adoption  of  agriculture.  For  this  purpose  a  somewhat  different 
line  of  cleavage  seems  desirable. 

If  we  regard  economic  conditions  from  the  standpoint  of  the 
relations  of  production  to  consumption  —  for  these  are  the 
fundamental  economic  facts  —  we  may  divide  the  world's  his- 
tory into  three  great  stages,  known  respectively  as  the  self- 
sufficing  economy,  the  trade  or  commercial  economy  and  the 
capitalist  or  industrial  economy.     From  another  point  of  view 


§  3i]  Isolated  Economy  75 

these  may  also  be  called  the  isolated  economy,  the  local  or  village 
economy  and  the  national  economy.  These  we  shall  now 
proceed  to  consider. 

31.   Self-sufficing  or  Isolated  Economy 

By  this  term,  is  meant  a  form  of  organization  where  the 
economic  unit  or  household  produces  everything  that  it  needs 
and  consumes  all  that  it  produces.  In  its  typical  form  the 
household  raises  the  raw  materials  for  food  and  for  clothing, 
provides  its  own  shelter  and  works  up  into  finished  products 
everything  necessary  for  its  final  consumption.  What  little 
division  of  labor  exists  takes  place  within  the  household,  and 
grows  only  with  the  expansion  of  the  household's  needs. 
I  Whether  the  household  is  small  or  large,  however,  it  is  always 
a  unit  by  itself;  it  has  normally  no  necessary  relations  with  any 
other  unit.  Its  economic  characteristic  is  its  self-sufficiency 
and  therefore  its  isolation. 

This  self-sufficing  economy  assumes  manj^  different  aspects 
in  the  course  of  history.  The  economic  unit  may  be  either 
a  family  or  a  larger  group.  It  may  rest  either  on  slave  labor 
or  on  free  labor.  It  is  the  universal  form  of  the  beginnings  of 
society,  in  the  root-grubbing  or  hunting  stages,  and  is  always 
found  in  the  early  periods  of  the  pastoral  and  agricultural  stages. 
It  is  seen  in  the  frontier  life  of  more  advanced  communities, 
for  the  family  of  the  backwoodsman  in  the  United  States  is  in 
this  respect  like  the  earliest  groups  known  to  history.  It  is 
found  in  Greece,  where  the  landed  estate  was  called  the  oikos. 
It  is  typified  in  the  Roman  familia,  which  is  the  name  for  the 
entire  possessions  of  the  Roman  citizen,  including  his  wife, 
his  children,  his  slaves,  his  land  and  all  his  other  belongings. 
It  is  represented  in  the  manor  of  mediaeval  Europe  and  in  the 
plantation  of  the  American  slaveholder.  It  is  found  even 
to-day  in  the  Russian  mir,  or  village  community,  and  in  some  of 
the  Danubian  principalities. 

Everywhere  the  distinguishing   mark   is   the   self-sufikicncy, 


76  Economic  Stages  [§  31 

or  home  production  and  home  consumption,  of  the  economic 
unit.  It  is  not  a  question  of  slavery,  for  we  find  the  same 
economic  form  in  the  mediaeval  manor  resting  on  serfdom,  and 
in  the  primitive  or  still  surviving  community  of  freemen.  It 
is  not  a  question  of  autocratic  power,  for  we  find  it  equally  in 
the  democratic  Russian  mir  and  the  aristocratic  American  plan- 
tation. However  different  the  forms,  the  essence  is  the  same. 
The  landlord,  whether  a  single  person  or  a  group,  is  the  property 
lord.  The  estate  forms  a  complex  whole.  Production  is  carried 
on  by  the  group,  and  there  is  no  sharp  line  between  producers 
and  consumers.  The  wants  of  the  group  members  are  satisfied 
by  their  own  labor,  and  not  by  that  of  some  other  economic 
unit.  As  consumers  they  are  no  less  independent  than  as 
producers. 

In  the  course  of  time,  indeed,  the  households  that  possess 
natural  or  acquired  advantages  in  the  production  of  certain 
commodities  learn  to  raise  a  surplus,  and  trade  it  off  to  other 
groups  for  various  purposes,  —  at  first  propitiatory  in  character, 
but  later  in  the  expectation  of  securing  similar  advantages  in 
return.  In  this  way  barter  develops.  But  at  the  outset,  and 
for  a  long  time,  there  is  no  barter,  because  in  a  typical, 
self-sufficing  economy  there  is  no  need  of  barter.  In  fact,  the 
exchange  of  commodities  seems  wrong  because  it  is  unnatural. 
The  propensity  to  "truck,"  which  Adam  Smith  considered  nat- 
ural to  man,  is  in  reality  the  outcome  of  a  long  evolution.  To 
truck  is  etymologically  to  trick,  just  as  barter  in  its  original  form 
(old  French  bareter)  means  to  cheat .^  Even  when  exchanges 
develop,  the  transactions  are  always  attended  by  rigid  formali- 
ties, often  invested  with  a  religious  sanction. 

The  fact  of  exchange  between  the  groups  does  not  neces- 
sarily alter  the  organization  of  economic  life,  as  long  as  the  great 
mass   of   commodities   are   produced  and  consumed  at  home. 

1  This  meaning  has  survived  in  our  "  barrator,''  although  by  a  cu- 
rious development  it  is  now  confined  to  the  deceitful  shipmaster,  or  to 
the  cheating  and  meddlesome  instigator  of  litigation. 


§  32]  Commercial  Economy  77 

Thus,  for  instance,  we  find  in  the  later  centuries  of  Greek  life 
that  many  of  the  estates  produced  raw  materials,  and  sometimes 
luxuries,  to  be  sold  in  the  cities  which  enjoyed  an  active  com- 
mercial life.  So  in  Rome  during  the  period  of  its  greatest  pros- 
perity, the  large  estates  devoted  themselves  to  some  one  product, 
like  wine  or  oil  or  wheat  for  export,  which  was  carried  on  by 
large  trading  companies.  So,  again,  in  the  American  plantation 
a  single  commodity,  like  tobacco  or  cotton  or  sugar,  raised  for 
export  and  handled  in  the  towns,  generally  constituted  the  very 
foundation  of  its  success.  It  is  still  true,  however,  that  even 
in  these  cases  the  great  mass  of  commodities  used  at  home 
was  produced  at  home.  While  there  was  trade  between  the 
units,  there  was  little  if  any  trade  within  the  units,  and  while 
exchanges  in  the  bulk  even  as  between  the  units  amounted  to 
a  large  sum,  they  played  a  small  role  in  the  daily  life  of  each 
household.  Just  as  the  plantation  and  not  the  towns  gave  the 
imprint  to  the  civilization  of  the  South,  so  the  mir  and  not  the 
cities  typify  the  Russian  economic  life,  so  the  estates  and  not 
the  commercial  companies  shaped  the  history  of  republican 
Rome.  In  its  essence  the  economic  unit  was  still  predominantly 
self-sufficing.  Even  where  there  is  a  surplus  production  for 
the  market,  the  consumers  within  the  group  are  in  an  over- 
whelming degree  dependent  on  the  exertions  of  the  group. 

With  the  growth  of  commercial  intercourse  both  within  and 
between  those  early  economic  groups,  the  self-sufficing  character 
of  the  unit  begins  to  disappear,  and  there  is  gradually  ushered 
in  the  next  stage  of  economic  life. 

32.   Trade  or  Commercial  Ecouomy 

The  characteristic  feature  of  this  stage  is  the  fact  that  pro- 
duction is  no  longer  followed  directly  by  consumption,  but  that 
there  is  interposed  the  process  of  exchange.  The  demand  of 
consumers  is  now  met  primarily  through  the  medium  of  trade 
or  commerce.  The  significance  of  trade  does  not  arise  from  the 
fact  that  there  is  trade  between  the  units,  for,  as  we  have  just 


78  Economic  Stages  [§  32 

seen,  such  trade  is  found  in  the  later  stages  of  the  isolated  or 
household  economy.  But  we  now  have  trade  within  the  unit. 
The  members  of  the  household  no  longer,  as  before,  produce 
what  they  need,  but  primarily  produce  what  others  need.  We 
now  have  separate  classes  of  producers  and  separate  classes 
of  consumers.  Men  for  the  most  part  no  longer  consume  their 
own  products,  but  the  products  of  others  which  they  secure 
through  trade.  In  other  words,  instead  of  the  self-sufhcing 
economy  we  have  the  trade  or  commercial  economy. 

The  unit  of  economic  life,  although  broader  than  before, 
still  remains  local  in  character,  and  the  trade  and  industry  are 
largely  centred  in  the  villages.  Hence  we  also  speak  of  it  as 
the  local  or  village  economy.  We  can  study  this  stage  most 
clearly  in  medieval  history.  The  eleventh  and  twelfth  cen- 
turies witnessed  an  immense  impetus  given  to  commerce,  due 
chiefly  to  the  opening  of  new  routes  by  the  Crusades.  The 
markets  and  fairs  which  had  begun  on  a  small  scale  in  the  pre- 
ceding centuries  now  became  the  rule,  and  soon  assumed  a  more 
permanent  form  in  the  shape  of  villages  and  towns.  The  medi- 
aeval town  was  shut  off  from  its  neighbors  not  only  by  the  actual 
wall  of  stone  and  mortar,  but  by  the  no  less  important  economic 
barrier  of  trade  monopoly;  only  the  townsman,  the  burgess, 
might  freely  buy  or  sell;  only  he  was  admitted  to  the  many 
trade  privileges.  On  the  basis  of  this  economic  separation  was 
built  up  the  political  independence  which  is  so  marked  a  char- 
acteristic of  early  communal  life.  Although  we  call  it  the  village 
economy,  it  is  evident  that  the  economic  unit  was  not  the  village 
or  town  itself,  but  the  village  with  the  outlying  territory.  The 
lands  or  estates  provided  the  raw  materials  which  were  worked 
up  into  finished  products  within  the  town. 

The  breaking  up  of  the  older  unit,  moreover,  enhanced  the 
importance  of  industry.  In  the  preceding  stage  industry  was 
scarcely  differentiated  from  agriculture.  The  farmer  was  his 
own  carpenter,  the  farmer's  wife  did  the  haying  and  made  the 
family  clothes.     Even  where  the  estates  became  so  large  that 


§  32]  Commercial  Economy  79 

there  were  separate  classes  of  industrial  workers,  they  were  all 
under  the  control  of  the  landowner.  Now,  however,  the  village 
workmen  began  to  form  an  independent  class,  even  though 
many  of  the  workmen  might  have  a  little  garden  patch  of  their 
own.  The  point  is  that  they  no  longer  raised  the  raw  material 
for  industry,  but  bought  it.  The  farmers  grew  the  material, 
the  village  artisans  turned  out  the  product  and  each  class  pro- 
gressed by  trading  with  the  other. 

The  new  industry  was  based  on  trade  in  another  sense.  The 
artisan  not  only  bought  the  raw  material  in  small  quantities, 
but  sold  in  his  shop  or  in  his  booth  at  the  fair  the  products 
which  he  himself  had  finished.  The  workman  was  primarily 
a  trader,  and  his  success  depended  as  much  on  his  shrewdness 
in  trade  as  on  his  skill  in  industry.  It  was  only  by  degrees  that 
the  artisans  pure  and  simple  became  a  separate  class  and  that 
trade  was  carried  on  by  the  large  merchants.  For  a  long  time 
business  w'as  chiefly  of  a  retail  character  conducted  in  the  local 
markets  and  fairs,  and  even  when  the  scale  of  transactions  in  a 
few  staple  articles  reached  the  stage  of  wholesale  trade,  the 
modern  machinery  of  commerce  was  entirely  lacking. 

The  increasing  importance  of  the  trader  and  the  workman  was 
the  chief  cause  of  the  growing  sense  of  liberty  and  equaUty; 
the  mediaeval  town  was  the  birthplace  of  modern  democracy. 
It  took  a  long  time,  however,  for  industry  and  trade  to  attain 
a  dominant  position.  After  some  temporary  victories  in  Italy, 
the  trade  centres  won  their  first  lasting  triumph  in  the  Low 
Countries,  and  it  is  accordingly  there  that  we  find  the  earliest 
example  of  modern  republics  on  a  large  scale. 

In  the  later  development  of  this  economic  stage  there  were 
indeed  great  accumulations  of  wealth  gained  in  commerce  or 
wholesale  trade  side  by  side  with  the  wealth  in  land.  We  have 
not  only  the  feudal  landlords  but  the  merchant  princes.  If  we 
choose  to  apply  the  modern  term  capital  to  such  accumulations, 
we  find  agricultural  capital  and  commercial  capital,  but  with 
rare  exceptions  no  industrial  capital.     The  wealth  drawn  from 


8o     ,  Economic  Stages  [§  32 

the  land  was  under  prevailing  conditions  not  again  put  into  the 
land,  but  consumed  by  the  landowners;  the  wealth  accumulated 
in  trade  could  not  go  on  indefinitely  multiplying  ships  and 
vans  without  increasing  the  commodities  to  be  transported; 
but  since  these  commodities  were  produced  by  hand,  the  increase 
was  slow.  In  last  analysis,  therefore,  the  economic  civiliza- 
tion of  this  stage  rested  upon  the  petty  village  industry.  Com- 
mercial prosperity  and  agricultural  wealth  were  still  associated 
with  the  prevalence  of  the  small  workman  and  the  village 
economy. 

This  stage,  it  is  true,  assumes  different  phases.  In  some 
places  agricultural  prosperity  predominated  and  the  landowner 
was  supreme;  in  others,  like  the  Hansa  towns,  we  find  busy 
marts  of  wholesale  trade,  and  the  predominance  of  the  aristo- 
cratic commercial  families;  in  still  others  we  find  the  centres 
of  manufacture  and  the  political  mastery  of  the  craft  guilds. 
In  all  cases,  however,  we  have  the  typical  characteristics,  —  the 
small  trader,  the  petty  workman  and  the  local  economy.  The 
large  landowner .  sold  his  produce  in  the  neighboring  village 
market  and  drew  thence  his  articles  of  consumption,  outside 
of  simple  food.  The  merchant  prince  may  have  traded  with 
distant  lands,  but  the  great  bulk  of  the  transactions  was  local, 
and  the  business  of  the  national  and  international  fairs  was 
restricted  to  comparatively  few  articles.  Most  of  what  the 
workman  produced  was  made  to  order  for  the  local  market. 
The  village  or  town  was  the  unit;  the  foreigner  was  the  man 
who  came  from  a  different  town,  not  necessarily  from  a  different 
country. 

This  stage  of  economic  life  lasted  in  Europe  for  several  cen- 
turies. Various  causes  conspired  first  to  modify  and  finally 
to  destroy  it.  The  chief  factor  was  undoubtedly  the  accumu- 
lation of  wealth  caused  by  the  discovery  of  the  new  world  and 
the  opening  up  of  the  all-sea  trade  routes  to  the  East.  The 
discovery  of  immense  sums  of  precious  metal  in  America  and  the 
prodigious   impetus  given   to  commerce  both   East   and   West 


§  7,7,]  Industrial  Economy  8 1 

produced  a  heaping  up  of  riches  which  were  now  applied  on  a 
large  scale  to  further  production  in  industry,  and  which  gradually- 
changed  the  character  of  all  economic  life.  This  accumulation 
of  wealth,  applied  to  industry,  formed  what  came  to  be  known 
as  industrial  capital,  and  there  was  thus  ushered  in  the  third 

stage. 

33.   Capitalist  or  Industrial  Economy 

The  characteristic  feature  of  this  stage  is  the  appearance  of 
capital  on  a  large  scale,  applied  in  industry.  With  capital, 
there  naturally  came  the  capitalist,  the  owner  of  the  capital, 
the  employer  of  labor  force  and  the  director  of  industrial  enter- 
prise. In  the  isolated  stage  we  noticed  a  unity  pervading  the 
whole  economic  process;  in  the  local  and  handicraft  stage  we 
saw  that  the  unity  was  confined  to  production;  in  the  capitalist 
stage  production  itself  is  split  up.  At  first,  as  in  seventeenth 
and  early  eighteenth-century  England,  the  capitalist  makes 
his  appearance  at  the  beginning  or  end  of  the  productive  process: 
he  buys  the  raw  material  wholesale,  or  perhaps  even  disposes  of 
the  finished  product  at  wholesale,  leaving  the  remainder  of  the 
process  in  the  hands  of  the  independent  workman.  Somewhat 
later  the  capitalist  acquires  the  working  premises  and  finally  the 
technical  means  of  production.  The  workshop  becomes  the  fac- 
tory, the  tools  are  replaced  by  machines,  and  the  workman  be- 
comes the  factory  hand.  In  the  meantime  the  various  parts  of  the 
process  become  so  important  that  each  separate  stage  falls  into 
the  hands  of  distinct  groups  of  capitalists,  each  of  them  resting 
on  the  fundamental  class  of  factory  owners.  Thus  the  supply 
of  raw  material,  the  provision  of  plant  and  factory,  as  well  as  the 
getting  of  the  finished  product  to  the  consumer,  call  into  exist- 
ence distinct  classes  of  capitalists  for  each  step  in  the  process. 
Finally  the  power  of  capital  becomes  so  enormous  that  in  some 
industries  we  find  a  movement  toward  integration,  and  the  same 
capitalists,  now  associated  into  a  single  group,  gradually  acquire 
control  of  the  entire  process,  from  the  extraction  of  the  raw 
material  to  the  ultimate  disposition  of  the  finished  product 
6 


82  Economic  Stages  [§33 

to  the  consumer.  Thus  industrial  society  comes  to  he  organized 
on  its  present  complicated  hasis. 

Production  is  now  no  longer  to  order  in  small  quantities,  as 
in  the  previous  economic  stage,  but  large  stocks  are  accumulated 
to  be  disposed  of  when  the  market  is  favorable,  or  large  plants 
are  erected  to  fill  anticipated  large  orders.  The  leisurely 
methods  of  the  old  system,  regulated  more  or  less  by  custom, 
give  way  to  an  intense  competition  which  makes  itself  felt  in 
every  nook  and  corner  of  industrial  society.  The  last  vestige 
of  barter  transaction  disappears,  and  money  everywhere  forms 
the  link  between  exchanges.  Credit  outgrows  its  primitive 
forms  of  mere  personal  assistance  and  becomes  an  integral  part 
of  production  and  exchange.  The  desire  to  employ  capital 
lucratively  leads  to  the  attempt  to  economize  labor  force,  and 
brings  about  the  invention  of  new  machinery.  The  prodigious 
cheapening  of  production  converts  luxuries  into  necessities 
and  widens  the  consuming  power  of  the  people.  The  multi- 
plication of  wants  brings  new  industries  into  existence,  and  finally 
gives  more  employment  at  increasing  wages  to  the  laborer. 
At  the  same  time  the  enormous  power  of  capital  and  the  sep- 
aration of  society  into  industrial  classes  create  new  and  difficult 
problems. 

An  important  result  of  the  capitalist  stage  is  the  supplanting 
of  the  local  unit  by  the  nation.  Production  and  consumption 
no  longer  take  place  within  the  local  boundaries,  but  what  is 
produced  in  one  district  is  often  consumed  in  another.  The 
local  economy  broadens  into  a  national  economy.  The  larger 
economic  interests  now  require  protection  through  the  forma- 
tion of  broader  and  stronger  political  units.  Thus  the  petty 
feudal  principalities  disappear  and  the  modern  national  states 
are  born.  Town  is  no  longer  arrayed  against  town,  the  free- 
man or  burgess  gives  way  to  the  citizen  of  the  state;  the 
foreigner  is  now  the  man  from  a  different  nation,  not  from  a 
different  village.  In  the  early  stages  of  capitalistic  develop- 
ment the  nations  oppose  each  other  as  the  towns  had  previously 


^^7,]  Industrial  Economy  83 

done,  and  this  keen  national  competition  leads  to  much  good, 
although  not  unmixed  with  evil. 

More  recently  still,  the  further  application  of  capitalist 
methods,  the  improvements  in  transportation  and  communica- 
tion, coupled  with  the  growth  of  modern  speculation,  tend  to 
produce  a  world  market  for  most  products,  and  the  perturba- 
tions of  trade  are  quickly  transmitted  from  country  to  country. 
We  might  thus  even  be  tempted  to  speak  of  an  international 
rather  than  a  national  economy.  But  although  the  signs  are 
not  wanting  that  the  ultimate  outcome  will  be  the  creation  of 
such  a  world  economy,  it  must  not  be  overlooked  that  the 
economic  unit  to-day  is  still  the  nation,  and  that  the  national 
standpoint  is  being  only  slowly  transformed  by  universal  or 
international  considerations. 

The  capitaHst  stage  is  also  called  the  industrial  stage,  because 
industry  in  the  narrower  sense  is  the  chief  occupation.  In  the 
first  stage  agriculture  was  the  well-nigh  exclusive  form,  in  the 
second  stage  prosperity  rested  largely  on  trade,  in  this  stage 
agriculture  and  trade  alike  step  into  the  background.  All 
products  of  course  still  come  ultimately  from  the  soil;  but  an 
ever-increasing  quantity  of  wealth  consists  of  products  several 
degrees  removed  from  the  soil.  Production  of  wealth  to-day 
means  more  and  more  the  creation  of  finished  products.  Com- 
merce, again,  is  still  of  great  importance;  but  commerce  is  now 
primarily  the  handmaid  to  industry  rather  than  to  agriculture. 
Not  only  has  the  moneyed  interest  appeared  as  a  rival  of  the 
landed  interest,  but  the  moneyed  interest  itself  has  become 
intimately  bound  up  with  industry.  The  great  fortunes  arc 
gained  to-day  not  in  agriculture,  nor  even  in  commerce,  but  in 
industry.  The  typical  rich  man  in  the  first  economic  stage 
is  represented  by  the  feudal  landlord  or  the  plantation  owner; 
in  the  second  stage  by  the  merchant  princes,  such  as  the  Medici 
and  the  Fugger;  in  the  third  stage  by  the  Carnegies  and  the 
Rockefellers.  Agriculture  and  commerce  have  been  trans- 
formed by  the  application  of  capital  and  of  machine  methods. 


84  Economic  Stages  [§  7,7, 

The  most  prosperous  condition  and  the  widest  diffusion  of 
power,  of  culture  and  of  civilization  are  found  in  industrial 
rather  than  in  agricultural  nations. 

Some  countries,  like  China,  were  not  touched  by  this  move- 
ment, because  of  the  policy  of  commercial  exclusion.  So  that 
China  is  still  in  the  village  economy  stage.  Other  countries, 
like  Japan,  were  brought  into  the  new  movement  but  a  few 
decades  ago,  and  are  now  in  a  process  of  rapid  transition.  Still 
other  places,  like  some  of  the  backward  sections  of  Europe  and 
America,  lag  behind  in  the  movement.  In  classic  antiquity, 
as  we  have  seen,  the  second  stage  was  not  reached  for  a  long 
time.  Even,  however,  where  commerce  developed  on  a  large 
scale  and  the  civic  centres  flourished,  industry  was  still  of  a 
petty,  handicraft  character,  and  the  existence  of  slavery  coupled 
with  the  absence  of  any  such  revolution  in  the  world's  trade  as 
occurred  at  the  close  of  the  middle  ages  prevented  both  Greece 
and  Rome  from  entering  upon  the  later  stages  of  the  capitalistic 
era.  Capital  in  classic  antiquity  was  primarily  commercial 
capital;  capital  in  modern  times  is  predominantly  industrial 
capital. 


CHAPTER    VI 
THE  HISTORICAL  FORMS  OF  BUSINESS  ENTERPRISE 

34.   References 

C.  Biicher,  Industrial  Evolution  (1901),  ch.  iv;  Ashley  and  Cunningham 
(as  in  §  27);  T.  Veblen,  Theory  of  Business  Enterprise  (1904),  chs.  ii,  iii; 
J.  A.  Hobson,  Evolution  of  Modern  Capitalism  (1917),  chs.  iii,  iv;  G.  E. 
Howard,  History  of  Matrimonial  Institutions  (3  vols.,  1904),  I,  chs.  i-iv; 
H.  S.  Maine,  Ancient  Laiv  (1880),  ch.  ix;  and  Early  History  of  Institu- 
tions (rSSo),  ch.  iii;  C.  Gross,  The  Gild  Merchant  (1890);  W.  R.  Scott, 
The  Constitution  and  Finances  of  English,  Scottish  and  Irish  Joint  Stock 
Companies  (3  vols.,  1910-1912);  A.  Toynbee,  The  Industrial  Revolution 
(1884);  G.  Unwin,  Industrial  Organization  in  the  Sixteenth  and  Seven- 
teenth Centuries  (1904);  R.  M.  Tryon,  Household  Manufactures  in  the 
U.  S.,  1640-1860  (1917);  S.  J.  Chapman,  The  Lancashire  Cotton  In- 
dustry (1904);  A.  W.  Calhoun,  A  Social  History  of  the  American  Family 
(3  vols.,  1917-1919);  H.  Pirenne,  Belgian  Democracy  (1915), 

35.   Primitive  Economic  Activity  —  The  Clan 

Business  originally  meant  the  "being  busy"  for  a  mere  live- 
lihood; it  now  means  being  busy  for  profit.  In  the  same  way 
business  enterprise  originally  denoted  any  organized  form  of 
economic  activity;  it  has  now  come  to  involve  the  idea  of 
making  a  profit  or  securing  a  surplus.  "Enterprise"  is  the 
Romanic  form  of  the  Teutonic  "undertaking."  When  we 
undertake  to  secure  any  form  of  wealth,  we  have  economic 
activity;  when  we  undertake  to  secure  profits  through  some 
organized  activity,  we  have  an  undertaking  or  enterprise. 

With  the  immense  growth  of  such  activities  in  modern  times 
increased  importance  is  attached  to  the  organizer.  Not  so  long 
ago  we  called  the  head  of  the  undertaking  the  "undertaker"; 
nowadays  with  the  restriction  of  the  term  to  a  particular  class 
of  undertakings  we  have  come  to  call  him  the  head  of  the  enter- 
prise, or  the  enterpreneur. 

85 


86  Historical  Forms  of  Business  [§  35 

The  earliest  kinds  of  business  undertakings  are  outgrowths 
of  the  family.  The  family  itself,  however,  is  the  result  of  a 
long  evolution.  We  have  seen  that  our  savage  ancestors  roamed 
about  in  small  hordes  or  packs  of  a  few  dozen  individuals,  the 
numbers  being  dependent  chiefly  on  the  possibihty  of  securing 
available  food  supplies  from  the  berries  and  nuts,  the  chase 
and  the  waters.  After  the  breakdown  of  the  original  monopoly 
of  sexual  relations  on  the  part  of  the  leader  of  the  pack,  the  en- 
suing promiscuous  methods  of  pairing  gradually  gave  way  to 
more  or  less  permanent  forms  of  marriage,  in  which  kinship 
was  counted  through  the  mother.  For  amid  such  conditions 
of  group,  rather  than  individual,  marriage  relations  it  was  indeed 
a  wise  child  who  knew  its  own  father.  These  consanguine 
groups  or  collections  of  hordes  which  we  meet  almost  everywhere 
at  the  dawn  of  history  are  known  as  clans  (or,  to  use  the  Roman 
term,  gentes),  and,  from  the  fact  that  their  members  usually  trace 
their  kinship  through  the  mother,  are  called  uterine  or  maternal 
clans.  In  some  cases  where  the  primitive  agriculture  or  hoe- 
culture  carried  on  by  the  women  assumed  great  proportions, 
or  where  we  find  an  increasing  significance  attached  to  the  do- 
mestic arts,  like  weaving  and  baking,  the  social  importance  of 
the  female  was  reinforced  by  still  stronger  economic  reasons, 
and  we  encounter  a  system  of  society  known  as  the  matriarchate, 
—  the  government  by  women.  While  the  matriarchal  system, 
however,  is  occasional,  the  maternal  society  based  on  the  uterine 
clan  is  well-nigh  universal. 

Of  the  characteristics  of  this  early  gentile  or  clan  society 
there  is  room  to  say  only  a  few  words.  Of  a  family  in  the 
modern  sense  there  was  no  trace,  further  than  the  temporary 
living  together  of  the  mother  and  the  very  young  children. 
The  only  recognized  relationship  was  kinship  or  membership 
in  the  clan.  Owing  in  a  large  measure  to  the  survival  of  the 
primal  law  of  sexual  monopoly  of  the  head  of  the  original  horde, 
and  perhaps  also  to  a  recognition  of  the  injurious  results  of 
inbreeding,  the  custom  arose  of  contracting  marriage,  or  rather 


§  36]  The  Family  87 

of  entering  into  connubial  relations,  outside  of  the  clan;  and 
thus  there  developed  one  of  the  most  rigid  rules  of  primitive 
society,  the  system  of  exogamy,  or  the  prohibition  of  marriage 
between  members  of  the  same  clan,  as  constituting  incest.  Each 
clan  traced  its  descent  from,  and  often  took  the  name  of,  some 
mythical  ancestor,  —  generally  an  animal  or  plant.  This  to- 
tem, as  it  was  called,  became  sacred  and  was  soon  protected 
by  a  system  of  "taboo"  or  religious  prohibition.  The  origin 
of  the  totem  worship  is  still  shrouded  in  mystery,  but  is  probably 
to  be  sought  in  economic  reasons,  —  the  totem  being  at  first 
the  chief  source  of  food  supply  which  afterwards  became  so 
useful  for  purposes  of  barter  that  its  consumption  by  members 
of  the  clan  was  forbidden.  Where  conditions  were  favorable 
to  an  increase  of  population  the  clans,  although  always  pre- 
serving their  own  integrity,  developed  into  the  wider  groups  of 
phratries  and  of  tribes,  all  of  them  connected,  however  remotely, 
by  blood  relationship.  The  clans,  and  in  some  cases  the  tribal 
groups,  were  the  centres  for  common  sports,  celebrations  and 
worship,  and  in  the  clan  or  tribal  customs  we  find  the  germ  of 
what  afterwards  developed  into  both  law  and  morals. 

36.   The  Family 

The  decay  of  the  clan  or  gentile  society  was  again  due  largely 
to  economic  causes.  Where  conditions  favored  the  growth 
of  the  pastoral  system,  private  property  in  flocks  and  herds 
arose,  and  the  paramount  position  of  the  father  as  the  bread- 
winner and  the  defender  of  the  property  was  recognized.  Where 
the  hunting  and  root-grubbing  stage  was  supplanted  by  a  devel- 
oped agriculture,  the  labor  of  the  man  in  tilling  the  soil,  con- 
structing the  house  and  maintaining  the  patrimony  became  of 
signal  importance.  The  male  is  now  the  chief  factor  in  the 
economic  process,  and  we  accordingly  find  the  patriarchal 
family.  Famulus  is  the  Latin  for  servant  or  slave:  all  the 
members  of  (he  new  family  group  are  the  servants  of  the  father. 
The   family    relations   are   primarily   property   relations.     The 


88  Historical  Forms  of  Business  [§  36 

father  owns  the  land,  the  flocks,  the  wife  or  wives,  the  children, 
the  slaves,  and  exercises  scarcely  less  authority  over  the  other 
relatives  that  form  a  part  of  the  family  group.  The  father  gives 
his  name  to  the  wife  and  children,  and  the  patrimony  is  handed 
down  from  family  head  to  family  head.  We  now  find  that 
marriage  by  capture  gives  way  to  marriage  by  purchase;  and 
the  group  union  of  early  gentile  society  is  succeeded  by  the 
polygamy  and  finally  the  monogamy  of  the  patriarchal  head. 
The  unity  of  this  new  family  group  is  far  closer  and  its  discipline 
far  more  rigorous  than  that  of  the  clan,  and  the  recognition  of 
these  intimate  economic  relations  leads  to  the  growth  of  all  those 
finer  filial  and  fraternal  ties  which  are  the  nursery  of  ethical 
progress.  For  a  time  the  forms  of  the  old  gentile  society  are 
still  preserved  amid  the  newer  and  more  vigorous  patriarchal 
system,  either  under  an  agricultural  regime,  as  in  the  recorded 
beginnings  of  Greek  and  Roman  history,  or  under  pastoral 
conditions,  as  in  the  story  of  the  early  biblical  patriarchs.  But 
with  the  undermining  of  the  economic  foundations  of  the  clan 
system  the  whole  structure  of  gentile  society  crumbled.  Where- 
ever  territorial  relations  based  on  the  community  of  wider 
economic  interests  replaced  the  old  ties  of  blood  relationship 
within  the  clan,  tribal  society  developed  into  political  society 
and  thus  led  to  the  origin  of  the  state  and  of  organized  gov- 
ernment. 

In  Judaea,  Greece  and  Rome,  as  in  all  countries  that  had  to 
work  out  their  own  civilization,  this  gradual  evolution  can  be 
clearly  discerned.  In  other  cases  where  a  lower  civilization 
was  suddenly  brought  into  contact  with  a  higher  one,  the  steps 
are  often  less  gradual.  Thus  the  contact  of  the  Teutonic 
tribes  with  Rome  engendered  a  rapid  transition  from  gentile 
to  political  society,  but  with  a  decided  abbreviation  of  the 
patriarchal  period.  Much  the  same  is  true  of  the  influence 
of  the  English  on  the  Irish  septs,  which  lasted  well  into  the 
middle  ages,  and  on  the  Scottish  clans,  which  finally  disappeared 
as  a  power  only  a  century  or  two  ago. 


§  36]  The  Family  89 

The  patriarchal  family  was  thus  primarily  an  economic 
product.  The  family  became  and  remained  the  basis  of  social 
and  political  life.  With  the  growth  of  industry  and  commerce 
and  the  opportunity  for  independent  activity  on  the  part  of 
the  various  members,  the  old  family  group  split  up  and  was 
contracted  into  the  family  of  modern  times  with  its  smaller 
and  more  immediate  circle.  Finally,  the  most  recent  devel- 
opment of  economic  life  with  its  freedom  and  its  system  of 
competition  has  powerfully  contributed  to  a  still  further  loosen- 
ing of  the  family  discipline;  woman  has  emancipated  herself, 
divorce  has  become  frequent,  the  age  of  the  effective  inde- 
pendence of  the  children  has  been  continually  pushed  further 
back.  Thus  there  have  been  ushered  in  all  the  ethical  and 
social  problems  of  modern  family  life,  a  discussion  of  which 
transcends  the  scope  of  an  economic  treatise. 

The  family  thus  constitutes  the  earliest  form  of  business 
undertaking  only  in  the  original  sense  of  an  organization  to 
secure  a  competence  rather  than  a  surplus.  That  is  to  say, 
production  was  carried  on  within  the  family,  by  the  family,  for 
the  family;  both  producers  and  consumers  were  members  of 
the  family;  each  worked  for  all;  each  consumed  the  products 
of  all.  Yet  the  first  attempts  at  business  enterprise  in  the 
modern  sense  of  an  organization  for  gain,  of  producing  for  a 
market,  are  associated  with  the  later  developments  of  the  family 
groups.  The  great  slave  plantations  of  the  Roman  Republic, 
for  instance,  were  distinct  business  enterprises.  The  larger 
family  groups  which  became  the  village  communities  of  the 
early  middle  ages  and  which,  when  subjected  to  an  overlord, 
developed  into  the  manorial  system  were  occasionally,  at  least 
in  part,  business  enterprises,  as  in  England  after  the  period  of 
the  early  enclosures.  We  find  examples  of  this  co-operative 
family  or  group  enterprise  not  only  in  agriculture,  but  also  in 
commerce,  as  in  the  trade  transactions  of  the  mediicval  com- 
munes, and  even  in  industry,  as  in  the  Russian  ariels  or  co- 
operative groups  of  laborers  that  have  survived   to  this  day 


90  Historical  Forms  of  Business  [§  37 

In  its  essence,  however,  the  family  was  not  well  fitted  for  business, 
in  the  sense  of  profit-making;  and  with  the  increasing  importance 
of  the  competitive  life  the  abler  individuals  who  cut  themselves 
loose  from  the  family  group  forged  to  the  front.  With  the  greater 
conservatism  which  always  marks  the  tillers  of  the  soil  we  find 
this  process  slower  in  agriculture  than  in  industry  and  commerce. 
It  is  accordingly  in  these  latter  directions  that  we  must  first 
look  for  the  more  developed  forms  of  business  enterprise. 

37.   Help  or  Hire  System 

Where  industry  develops  beyond  the  capacity  of  the  family 
group  and  where  the  conditions  are  not  favorable  to  the  growth 
of  slavery,  we  find  the  beginnings  of  industrial  assistance  from 
outside  sources.  The  independent  laborer  who  roves  from 
house  to  house  and  from  place  to  place  does  more  of  the 
work  of  the  household.  Carpenters,  cobblers,  glaziers,  tin- 
smiths, masons,  seamstresses,  —  these  represent  a  few  of  the 
occupations  conducted  in  this  roving  fashion.  The  itinerant 
workman  receives  a  compensation  for  his  services  and  often 
becomes  for  the  time  being  a  member  of  the  family.  This 
custom  survives  even  to-day,  not  only  in  the  New  England 
institution  which  bears  the  significant  name  of  "help"  (even 
though  the  service  has  become  somewhat  more  permanent), 
but  also  in  the  temporary  assistance  given  to  our  Western 
farmers  at  harvest  time  by  the  "hired  man."  This  system 
can  thus  best  be  termed  the  help  or  hire  system. ^  It  is  found 
in  the  early  history  of  almost  every  society,  and  those  familiar 
with  the  rural  communities  of  Switzerland  and  Scandinavia 
will  recognize  it  as  the  prevalent  form  to-day. 

In  its  essence,  however,  the  help  system  is  an  intermediate 
and  transitional  form.  The  important  factor  is  still  the  family 
group;     the   consumer   furnishes   as   before   the   raw   materials 

'The  term  "  wage- work,"  used  by  Biicher  and  his  translator.  Indus- 
trial Evolution,  p.  162,  is  ill  chosen,  because  the  term  wage-earner 
inevitably  brings  to  mind  the  modern  factory  system. 


§38]  Handicraft  System  91 

and  receives  in  return  the  finished  product,  the  workman  sup- 
plying the  labor  force  and  sometimes  the  tools.  Gradually 
the  change  assumes  a  more  rapid  pace.  The  smaller  house- 
holds find  that  they  need  outside  help  more  frequently  but  less 
intensively,  and  the  larger  family  groups  find  it  profitable  to  set 
some  of  their  superliuous  assistants  to  work  for  others.  The  cus- 
tom arises  of  the  consumer  going  to  the  workman  rather  than 
the  workman  coming  to  the  consumer.  Thus  the  occupations 
of  the  village  blacksmith,  the  miller,  and  even  the  baker  and 
weaver  become  settled  trades.  The  itinerant  workman  acquires 
greater  permanence,  and  from  assistants  the  laborers  now  evolve 
into  a  class  independent  of  the  family  group.  When  this  step 
is  reached,  we  have  what  is  known  as  the  handicraft  system. 

38.   Handicraft  System 

Under  this  system  the  artisan  is  independent.  He  no 
longer  works  in  the  house  of  the  consumer.  He  occupies 
his  own  house,  he  goes  to  market  to  purchase  his  raw  mate- 
rials, he  works  up  the  raw  material  in  his  own  home  with  his 
own  tools  and  he  sells  the  finished  product  to  the  consumer 
in  his  own  shop.  We  no  longer  have  production  for  the 
family,  as  in  the  family  system;  we  no  longer  have  the  raw 
material  and  the  finished  product  belonging  to  the  consumer, 
as  in  the  help  system.  Every  phase  in  the  process  down  to 
the  sale  of  the  final  commodity  is  in  the  hands  of  the  workman 
himself.  The  workman  or  craftsman,  moreover,  finishes  every- 
thing by  hand,  and  it  is  for  this  reason  that  we  speak  of  the 
handicraft  system.  This  does  not  mean  that  things  were  not 
previously  and  even  subsequently  made  by  hand,  but  calls 
attention  to  the  fact  that  the  distinguishing  mark  is  the  grow- 
ing importance  of  industry  and  the  rise  of  an  independent  class 
of  workmen,  who  conduct  business  enterprises  by  themselves. 
Since  the  producer  makes  to  order  for  a  special  customer, 
the  system  is  also  sometimes  called  the  custom  system,  —  a 
term  still  surviving  in  the  custom-tailor  of  to-day. 


92  Historical  Forms  of  Business  [§  38 

In  the  middle  ages  the  workmen  gradually  banded  them- 
selves together  by  trades  into  compact  organizations  known  as 
guilds  or  crafts.  Historically  the  system  has  therefore  come 
to  be  known  as  the  guild  system.  The  guilds,  however,  were 
a  result  rather  than  a  cause;  and  in  many  parts  of  the  world 
we  find  the  handicraft  system  without  the  guilds.  Under 
the  guild  system  every  workman  might  ultimately  look  forward 
to  membership.  Starting  in  as  an  apprentice,  he  spent  a  few 
additional  years  as  journeyman,  and  when  he  had  finally 
mastered  all  the  details  of  the  trade,  he  was  admitted  as 
master  craftsman.  To  use  modern  terms,  which  had  no 
meaning  then,  he  was  at  once  employer  and  workman,  capital- 
ist and  laborer.  The  modern  differentiation  of  classes  was 
unknown.  At  the  height  of  their  power  the  guilds  often  se- 
cured a  political  domination.  In  many  countries  they  came 
to  be  virtually  identical  with  the  townsmen;  the  division  of 
labor  between  land  and  town  assumed  a  sharply  defined  form, 
and  the  manor  became  more  and  more  the  simple  purveyor 
of  raw  material  for  the  guild.  Just  as  the  family  system  of 
industry  corresponds  to  the  typical  isolated  household  economy, 
so  the  guild  or  handicraft  system  corresponds  to  the  typical 
trade  or  local  economy. 

The  guild  system  characterized  the  industrial  life  of  Europe 
for  several  centuries  after  the  Crusades.  With  the  increase  of 
wealth,  however,  a  twofold  process  went  on.  The  guilds  grew 
more  grasping  and  exclusive,  until  they  became  monopolistic 
bodies,  proving  a  drag  upon  industry  instead  of  a  help. 
Membership  was  confined  to  a  select  few  whose  right  to 
practise  the  trade  was  inherited,  and  the  mass  of  the  workmen 
could  no  longer  look  forward  to  participation  in  its  benefits. 
Newer  industries  started  wherever  they  could,  in  independence 
of  the  old  crafts.  Secondly,  and  more  important,  as  the  richer 
craftsmen  amassed  wealth,  they  as  well  as  the  larger  traders 
desired  to  put  it  to  productive  uses.  Thus,  as  we  have  seen, 
there  developed  a  true  industrial  capital  which  could  not  well 


§  39]  Domestic  System  g^ 

find  employment  within  the  limits  of  the  old  system.  The 
guild  or  handicraft  system  slowly  decayed,  and  there  was 
ushered  in  the  next  stage,  known  as  the  domestic  system. 

39.   Domestic  System 

Here  for  the  first  time  we  find  a  line  drawn  between  the 
capitalist  employer  and  the  workman.  In  the  help  system 
there  was  also  an  employer,  but  he  was  himself  both  workman 
and  consumer.  In  the  handicraft  system  the  employer  was  no 
longer  the  consumer,  but  was  still,  in  part  at  least,  the  workman. 
In  the  domestic  system  the  employer  and  the  workman  are  dif- 
ferentiated. The  method  of  sale  of  the  finished  product,  more- 
over, is  another  point  which  distinguishes  the  domestic  system 
not  only  from  the  help  system  but  also  from  the  handicraft 
system.  In  the  help  system  the  product  is  not  sold  at  all;  it 
is  consumed  by  the  employer.  In  the  handicraft  system,  where 
production  is  carried  on  on  a  small  scale  and  to  order,  the 
commodity  is  sold  directly  by  the  workman  to  the  consumer. 
Now,  however,  where  capital  has  made  production  on  a  larger 
scale  possible,  the  market  is  so  widened  that  the  individual 
workman  is  no  longer  able  to  control  the  means  or  to  devise 
the  machinery  for  placing  the  products  on  the  market.  The 
capitalist  alone  can  do  this. 

The  essence  of  the  domestic  system  consists  in  the  fact  that 
while  the  workman  stiU  owns  his  tools  and  conducts  the  work 
in  his  own  home,  often  with  the  aid  of  his  family  and  in  con- 
nection with  some  agricultural  activity,  he  no  longer  disposes 
of  the  finished  product.  In  most  cases,  in  fact,  he  no  longer 
buys  or  provides  the  raw  material;  for  the  same  capitalist  who 
disposes  of  the  product  also  finds  it  possible  to  purchase  the 
raw  material  in  larger  quantities.  The  division  of  labor  goes  a 
step  farther  than  in  the  guild  system.  Not  only  does  one 
class  produce  the  raw  material,  and  another  the  commodity; 
but  the  production  of  the  commodity  itself  is  now  divided 
between  two  classes,  the  one  buying  the  materials  and  market- 


94  Historical  Forms  of  Business  [§  39 

ing  the  goods,  the  other  furnishing  the  productive  power  or 
manual  labor,  the  tools  and  the  work  place. 

The  term  domestic  system  is  not  a  happy  one,  for  under  the 
handicraft  or  guild  system  the  laborer  also  worked  in  his  own 
home.  It  is  used,  however,  to  distinguish  this  form  of  capitalistic 
enterprise  from  its  successor  where  the  laborer  no  longer  works 
at  home.  Again,  under  the  domestic  system  the  laborer  still 
works  by  hand,  but  since  he  is  no  longer  in  control  of  the  entire 
process  of  production  we  distinguish  it  from  the  handicraft  sys- 
tem. The  term  that  was  now  applied  to  the  domestic  workman  is 
manufacturer,  the  maker  by  hand  {manus,  facere) .  Sometimes, 
instead  of  domestic  or  home  work,  we  speak  of  commission  work. 
The  capitalist  owner  of  a  commodity  commits  it  to  another  in- 
dependent individual  to  be  worked  up  and  returned  to  him.  In 
the  clothing  trade  to-day  we  still  distinguish  between  custom 
work  (the  old  handicraft  system)  and  commission  work. 

The  domestic  system,  which  developed  during  the  seven- 
teenth century  and  reached  its  climax  in  England  in  the 
eighteenth,  was  modified  with  the  immixture  of  capital  into  the 
successive  stages  of  business.  The  most  important  change 
was  due  to  the  desire  to  economize  in  production  and  to  ap- 
ply capital  lucratively  through  the  invention  of  labor-saving 
devices,  or  machines,  which  substituted  mechanical  power  for 
human  labor.  In  the  textile  industries,  the  period  before 
1770  marks  the  early  experiments,  the  period  1 770-1 790  the 
development  of  the  great  mechanical  inventions,  the  period 
1 790-1 830  the  application  of  steam  power,  and  the  period 
after  1830  the  widening  of  the  market  through  the  railway  and 
the  steamship.^  The  other  industries  soon  followed;  and  there 
was  thus  inaugurated  what  is  termed  the  factory  system. 

iThe  important  dates  are:  Kay's  flying  shuttle,  1738;  Hargreave's 
spinning  jenny,  1764;  Arkvvright's  spinning  frame,  1768;  Crompton's 
mule,  1779;  Cartwright's  power  loom,  1785;  Watt  and  Boulton's  steam- 
engine,  1785. 


§  4o]  Factory  System  95 

40.   Factory  System 

This  system  is  the  one  under  which  the  modern  world  lives. 
Here  the  capitalist  employer  not  only  provides  the  raw  mate- 
rial and  disposes  of  the  finished  product,  but  also  controls  the 
intermediate  process.  The  machinery  is  so  costly  as  to  be 
beyond  the  reach  of  the  workman;  and  since  the  machines  are 
the  property  of  the  employer  the  building  in  which  production 
is  carried  on  must  also  belong  to  him  and  is  called  the  factory. 
The  laborer  is  not  his  own  master,  as  in  the  handicraft  system, 
he  no  longer  owns  the  tools  and  the  workshop,  as  in  the 
domestic  system:  all  that  he  does  is  to  provide  the  human 
labor  force  which  is  applied  through  machines  and  in  work- 
places owned  by  the  capitalist  employer.  The  stupendous  in- 
crease of  production  which  is  thus  rendered  possible  reacts 
upon  the  laborer,  both  as  producer  and  as  consumer.  Popu- 
lation increases  enormously,  and  there  is  a  continual  drift  from 
the  country  to  the  city.  Industrial  society  receives  its  modern 
shape,  and  the  social  income  is  divided  into  the  rent  of  the 
landowner,  the  wages  of  the  laborer,  the  interest  of  the  capi- 
talist and  the  profits  of  the  entrepreneur.  "Manufacturer" 
no  longer  means  the  handworker,  but  the  individual  who  em- 
ploys others  to  work  for  him.  The  development  of  capital 
leads  to  keener  competitioji  and  speculation,  new  classes  of 
capitalist  middle-men  arise  and  the  machinery  of  credit  and 
exchange  is  transformed.  The  predominance  of  the  industrial 
capitalist  employer  is  so  pronounced  as  to  give  to  the  whole 
form  of  business  enterprise  the  name  factory  system. 

So  markedly  different  is  this  from  any  of  its  predecessors 
that  the  process  which  brought  it  about  is  commonly  termed 
the  Industrial  Revolution.  If  by  revolution,  however,  we  mean 
a  sudden  and  complete  overturning  of  the  old,  the  name  is  ill 
chosen.  For  the  process  was  a  gradual  one.  It  look  several 
decades  for  the  transition  in  the  English  textile  industries  to  be 
consummated,  and  in  the  other  occupations  the  supplanting  of 


96  Historical  Forms  of  Business  [§  41 

the  domestic  by  the  factory  system  proceeded  step  by  step 
during  the  ninteenth  century.  Outside  of  England,  the 
movement  came  later  and  more  slowly,  while  even  in  England 
there  are  stiU  a  few  trades,  like  those  of  the  glass-workers,  the 
cutlers  and  the  chain-makers,  in  which  the  factory  system  has 
made  only  slight  inroads. 

It  must  not  be  thought  that  each  of  these  forms  of  enterprise 
is  marked  off  from  the  others  by  sharp  lines.  In  every  stage 
we  notice  survivals.  The  family  system  is  still  found  in  the 
outlying  regions  of  almost  all  countries  where  modern  ideas 
have  not  completely  penetrated,  as,  for. instance,  the  Southern 
Appalachian  mountains;  the  help  system  survives  in  various 
kinds  of  domestic  and  other  service;  the  handicraft  method  is 
typified  in  the  cobbler  or  custom  tailor;  the  domestic  system 
plays  a  considerable  role  in  the  hand-loom  weavers  of  Europe 
and  the  sweat-shops  of  modern  cities  with  their  commission 
work  in  the  clothing  trade.  The  economic  life  of  a  people, 
however,  is  characterized  by  the  type  forms,  not  by  the  sur- 
vivals of  a  preceding  system.  Modern  business  enterprise  is 
based  to  an  overwhelming  degree  on  the  factory  system. 

41.  Associated  and  Corporate  Enterprise 

We  have  thus  far  discussed  the  growth  of  business  enter- 
prise from  the  point  of  view  of  the  differentiation  of  the  entre- 
preneur. We  have  now  to  treat  it  briefly  from  the  point  of 
view  of  associated  production.  Here  we  can  trace  four  stages, 
—  enterprises  carried  on  by  individuals,  by  partnerships,  by 
corporations,  by  trusts. 

(i)  We  have  seen  that  while  the  family  was  the  earliest  form 
of  associated  activity  it  was  not  well  suited  to  the  keen  eco- 
nomic struggles  inseparable  from  business  life.  Business  enter- 
prise really  begins  with  the  business  man,  and  the  business  man, 
now  as  then,  is  to  a  large  extent  born,  not  made.  Sagacity, 
boldness,  good  judgment  and  administrative  ability  have  always 
been  the  mental  equipment  of  the  successful  merchant.     To 


§  4i)  Corporate  Enterprise  97 

the  extent  that  the  individual  has  possessed  these  qualities,  he 
has  forged  ahead.  As  business  enterprises  increased,  however, 
the  individual  often  found  himself  unable  to  cope  with  the 
situation  single-handed.  He  therefore  associated  himself  with 
others  who  possessed  some  of  the  qualities  which  he  lacked. 

(2)  The  partnership  was  a  device  to  strengthen  enterprise  at 
its  weak  points.  It  meant  the  association  of  various  kinds  of 
abUity,  and  often  of  capital  and  ability,  and  multiplied  to 
that  extent  the  economic  efficiency  of  the  unit.  The  partner- 
ship, however,  has  decided  limitations.  The  personal  relation 
between  the  partners  and  the  need  of  implicit  confidence  in 
each  other  necessarily  restrict  it  to  a  few  individuals.  As 
soon  as  the  business  calls  for  the  employment  of  a  capital 
beyond  the  means  or  the  desires  of  a  few  partners,  a  new  form 
of  enterprise  is  needed.     This  is  supplied  by  the  corporation. 

(3)  Although  according  to  the  recent  researches  of  Deloume 
and  Weber  the  commercial  corporation  probably  existed  in 
the  later  centuries  of  the  Roman  Republic,  in  its  modern 
shape  it  dates  from  the  early  mediaeval  Italian  cities.  The 
earliest  form  was  that  of  a  so-called  "bank,"  individuals 
associating  their  capital  to  form  a  joint  stock,  loaning  it  to  the 
government  on  a  pledge  of  certain  revenues,  and  participating 
in  the  profits  according  to  their  holdings.  Thus  the  beginnings 
of  public  credit  and  of  corporate  enterprise  are  found  in- 
timately associated.  The  next  important  development  of  the 
joint-stock  principle  was  in  the  trading  companies  of  the  six- 
teenth century,  which  were  at  first  mere  temporary  associations 
for  the  purposes  of  a  single  voyage,  but  which  gradually 
assumed  a  more  permanent  form.  It  was  not,  however,  until 
the  predominance  of  industrial  over  commercial  capital  in  the 
nineteenth  century  that  we  find  the  immense  expansion  of  cor- 
porate enterprise  which  marks  modern  life. 

The  economic  advantages  of  corporations  are  threefold,  — 
joint  stock,  limited  liability,  perpetual  life.  Through  the 
device  of  the  corporate  security,  the  number  of  the  investors 


98  Historical  Forms  of  Business  [§  41 

may  be  multiplied  without  limit.  Every  stockholder  has  a 
voice  in  the  enterprise  in  proportion  to  his  investment.  He 
is  liable  for  the  debts  or  losses  only  to  the  limit  of  his  own 
share.  Modern  states  have  been  slow  to  recognize  this  prin- 
ciple of  limited  liability,  but  it  now  forms  the  very  heart  of  the 
system.  It  removes  the  apprehension  and  distrust  which  lay 
at  the  basis  of  the  overgrown  partnership  and  the  unlimited 
liability  company.  It  has  facilitated  the  marketing  and  trans- 
fer of  the  shares  and  has  rendered  possible  the  vast  accumu- 
lation and  the  minute  dissemination  of  capital.  Finally,  the 
corporation,  unlike  the  individual,  never  dies  until  the  business  is 
liquidated;  the  shareholders  disappear,  the  shares  remain.  It 
has  all  the  advantages  of  permanence  and  stability;  it  can  plan 
for  the  morrow  as  well  as  for  to-day,  and  by  proper  choice  and 
renewal  of  its  board  of  directors  it  can  continually  command 
the  highest  ability  and  adjust  itself  to  altered  needs. 

As  against  these  advantages  there  are  undeniable  short- 
comings^ The  "corporation  problem"  touches  the  threefold 
relation  of  the  corporation  to  the  investors,  the  employees  and 
the  public.  The  protection  of  the  minority  stockholders  and 
of  the  "innocent  investors,"  the  mutual  relation  of  the  stock- 
holder and  the  bondholder,  and  the  enforcement  of  real 
trusteeship  on  the  part  of  the  directors  are  matters  that  still 
remain  to  be  adjusted.  The  conditions  of  employment  are 
often  modified  by  what  is  termed  the  substitution  of  the  cash- 
nexus  for  the  old-time  personal  bonds  between  employer  and 
employee.  The  corporation  proverbially  has  no  soul.  Finally, 
as  against  the  public  the  corporation  will  often  do  what  indi- 
viduals as  such  would  shrink  from  doing.  It  is  not  a  light 
task  to  raise  the  plane  of  corporate  morality  to  that  of  individ- 
ual business  ethics.  With  all  its  shortcomings,  however,  the 
corporation  is  indispensable  to  modern  business  activity. 
Without  it  the  world  would  revert  to  a  more  primitive  state  of 
economic  well-being,  and  would  virtually  renounce  the  inesti- 
mable benefits  of  the  best  utilization  of  capital. 


§  4i]  Corporate  Enterprise  99 

(4)  Where  ihc  advantages  of  united  capital  on  a  gigantic 
scale  become  still  more  apparent,  the  associations  of  individuals 
into  corporations  are  further  developed  into  unions  between 
corporations.  These  at  first  assume  the  form  of  more  or  less 
loose  agreements,  fixing  prices  or  conditions  of  production. 
A  further  stage  is  reached  when  receipts  are  pooled,  and  the 
unions  adopt  the  name  of  pools.  A  still  closer  association  is 
effected  when  the  enterprises  are  united  under  a  common 
head,  and  known  as  trusts,  because  originally  the  co-operating 
corporations  put  their  respective  holdings  of  stock  into  the 
hands  of  trustees,  who  were  to  direct  the  joint  enterprise. 
Where,  as  in  the  United  States,  this  particular  method  of  union 
has  been  declared  illegal,  the  same  results  have  been  reached 
by  forming  a  new  and  independent  corporation.  What  are 
to-day  popularly  called  trusts  are  simply  huge  corporations. 
The  trust  problem  is  therefore  in  many  respects  a  phase  of  the 
corporate  problem.  From  this  point  of  view,  as  we  shall  see 
hereafter,  the  so-called  trust  is  as  much  a  natural  development 
from  the  small  corporation  as  the  corporation  itself  is  an  out- 
growth of  the  business  partnership,  or  the  partnership  an  evo- 
lution of  individual  activity.  The  reasons  and  limits  of  this 
development  will  be  studied  below.  It  is  clear,  however,  that 
with  the  growth  and  differentiation  of  capital,  under  the  pro- 
digious development  of  modern  industry,  the  forms  of  business 
enterprise  are  steadily  becoming  more  intricate. 


CHAPTER  VII 
ECONOMIC  DEVELOPMENT  OF  THE  UNITED   STATES 

42.  References 

G.  S.  Callender,  Selections  from  the  Economic  History  of  the  United  States 
(1909);  E.  L.  Bogart,  Economic  History  of  the  United  States,  2d  ed.,  1912; 
K.  Coman,  Industrial  History  of  the  United  States  (new  ed.,  191 1);  G.  L. 
Beer,  The  Commercial  Policy  of  England  toward  the  American  Colonies 
(1893),  The  Origins  of  the  British  Colonial  System  (1907),  The  Old  Colonial 
System,  1660-17 54  (4  vols.,  1912-1915),  and  British  Colonial  Policy, 
1734-176 j  (1908);  W.  E.  Weeden,  Economic  and  Social  History  of  New 
England  (2  vols.,  1890);  A.  B.  Hart  (ed.),  Social  and  Econofnic  Forces  in 
American  History  (1914);  Johnson,  van  Metre,  Huebner  and  Hanchett, 
History  of  Domestic  and  Foreign  Commerce  of  the  United  States  (19 15); 
V.  S.Clark,  History  of  Manufactures  in  the  United  Stales  (1916);  E.  D. 
Fite,  Social  a)ul  Industrial  Conditions  during  the  Civil  War  (1910); 
W.  I.  King,  The  Wealth  aiui  Income  of  the  People  of  the  United  Stales 
(1915)- 

43.  Early  Period  of  American  Economic  Life 

The  United  States  is  a  particularly  interesting  illustration  of 
economic  development,  because  of  its  rapid  pace  and  because 
of  the  co-existence  of  different  phases.  At  the  beginning  the 
striking  fact,  as  in  all  colonies,  was  the  contact  of  an  intellec- 
tually advanced  population  with  primitive  economic  conditions. 
The  white  man  brought  with  him  the  civilization  of  the  old 
world,  and  was  saved  the  necessity  of  the  painful  evolution  of 
centuries.  Possessing  the  use  of  perfected  tools,  the  concep- 
tion of  private  property,  the  institutions  of  government  and 
of  the  family,  it  was  impossible  for  him  to  revert  to  the  hunt- 
ing or  nomadic  stage.  The  impracticability  of  converting  the 
savage  at  once  into  a  husbandman  led  to  the  disappearance  of 
the  red  man  before  the  economic  onset  of  the  colonist.     Yet 


§  43]  Early  Period  i  o  i 

in  the  presence  of  a  vast  and  unsubjugated  expanse  of  nature 
the  immigrant  had  to  start  afresh  and  to  unlearn  many  a  lesson 
of  his  former  home.  Coming  from  a  trade  pr  local  economy, 
he  was  thrown  largely  upon  his  own  resources  in  a  com- 
paratively isolated  economy.  Agriculture  again  became  the 
predominant  occupation:  an  agriculture,  however,  now  based 
not  upon  feudalism,  but,  in  the  North  at  least,  upon  the 
independent  farmer.  The  attempts  to  introduce  into  the 
Middle  states  the  types  of  mediaeval  land  relations  could  not 
be  permanently  successful;  and  only  in  the  South,  for  obvious 
reasons,  was  it  possible  to  reintroduce  the  primitive  system  of 
slavery. 

The  typical  American  was  the  backwoodsman,  using  his  gun 
but  wielding  his  axe,  and  depending  primarily  upon  his  hoe 
and  plough.  Step  by  step  he  cleared  the  forest  and  cultivated 
the  soil,  and  in  this  continually  renewed  contest  with  nature 
hammered  out  those  sturdy  qualities  of  mind  and  heart  which 
soon  enabled  him  to  add  political  to  economic  independence. 
The  frontier  is  the  home  of  democracy,  because  the  frontier  is 
the  home  of  economic  equality.  As  it  was  gradually  pushed 
inland  the  communities  which  had  left  the  frontier  stage  behind 
them  developed  from  the  family  system  of  industry,  through 
the  help,  into  the  handicraft  and  domestic  system.  The  guilds 
which  were  fast  decaying  in  the  old  world  found  no  foothold 
in  the  new;  and  as  the  villages  and  towns  sprang  up  the  in- 
significant industry  was  carried  on  by  the  independent  handi- 
craftsman. Everywhere,  moreover,  agriculture  was  the  chief 
source  of  wealth. 

In  the  South  the  increasing  accumulations  of  wealth  were 
put  into  more  land  and  more  capital.  In  the  Middle  states, 
and  a  little  later  in  'the  Northern  states,  the  new  wealth  took 
the  form  of  commercial  capital;  and  as  it  was  gradually  pushed 
into  industry  the  domestic  system  arose.  At  the  time  of  the 
Revolution  and  down  to  the  war  of  1812  the  "manufacturer" 
was  still  the  manual  workman,  and  the  whole  industrial  devel- 


I02  Economic  Development  [§44 

opinent  was  insignificant  in  the  cxlrcme.  The  war  with  Eng- 
land and  the  years  of  unrest  which  preceded  it  brought  about 
a  shifting  of  capital  from  commercial  to  industrial  pursuits, 
and  the  factory  system  was  fairly  inaugurated,  in  a  few  of  the 
textile  industries  at  least.  Under  the  fostering  care  of  the 
"American  system,"  as  the  new  protective  policy  was  called, 
the  industries  throve,  —  although  we  must  not  exaggerate  the 
influence  of  legislation  upon  what  would  at  all  events  have 
been  the  natural,  even  if  slow,  evolution  of  industrial  capital. 
For  this  natural  growth  in  the  North  and  East  was  due  to  the 
pushing  of  the  frontier  beyond  the  Alleghanies,  and  to  the  con- 
sequent accumulation  of  agricultural  profits  which  soon  took 
the  form  of  industrial  capital  under  the  impetus  of  the  demand 
of  an  increasing  population  for  manufactured  products.  Nor 
was  this  growth  checked  by  the  reversal  of  the  tariff  policy  and 
the  adoption,  during  the  thirties  to  the  fifties,  first  of  the  Com- 
promise, and  then  of  the  so-called  Free  Trade  systems,  dictated 
by  the  manifest  interests  of  the  politically  dominant  South. 
The  South,  as  the  exporter  of  cotton  and  the  importer  of 
manufactured  products,  had  clearly  no  interest  in  the  develop- 
ment of  industrial,  as  over  against  commercial  or  agricultural, 
capital. 

44.  Growth  of  American  Industry  in  the  Nineteenth  Century 

The  growth  of  prosperity  during  the  middle  of  the  nine- 
teenth century  was  due  primarily  to  other  causes,  three  in 
number:  (i)  the  rich  valleys  of  the  Mississippi  and  its  tribu- 
taries were  reached  by  the  tide  of  immigration;  (2)  the  aboli- 
tion of  the  corn  laws  in  England  opened  a  vast  and  profitable 
outlet  for  the  increasing  yield  of  wheat;  (3)  the  discovery  of 
gold  in  California  furnished  an  immense  treasury  of  mineral 
wealth.  There  was  thus  repeated  on  a  large  scale  what  had 
occurred  in  a  smaller  way  a  generation  earlier.  This  conver- 
sion of  agricultural  and  mineral  wealth*  into  industrial  capital 
assumed,    however,    a    slightly   different    form.     Although    the 


§44]  Recent  Growth  lo-^ 

textile  and  iron  industries  now  supplied  a  larger  output  for  the 
increasing  demand  of  a  quickly  growing  population,  the  chief 
need  and  the  most  lucrative  employment  of  capital  was  associ- 
ated with  the  development  of  modern  transportation  methods. 
The  railroad  becomes  the  most  striking  form  of  corporate  en- 
terprise. Up  to  the  middle  of  the  century  the  few  corpora- 
tions —  chiefly  banks,  turnpikes,  canals  and  railways  —  were 
compelled  to  take  out  separate  charters.  Now  under  general 
incorporation  laws  the  railroads  multiplied  and  soon  brought 
in  their  wake  all  kinds  of  industrial  enterprises.  From  this 
time  on  the  country  was  fairly  launched  on  the  wide  sea  of 
corporate  activity. 

The  agitation  which  culminated  in  the  civil  war  was  at 
bottom  the  political  expression  of  an  economic  antagonism 
between  two  divergent  systems.  The  one  was  based  on  agri- 
culture, and  heaped  up  its  wealth  in  the  transition  forms  from 
an  isolated  to  a  trade  economy  resting  on  slavery.  The  other 
had  but  just  entered  on  the  stage  of  the  capitalist  economy, 
and  the  influence  of  the  rapidly  developing  factory  system  in 
providing  a  home  market  for  the  independent  Western  farmer 
soon  united  the  economic  interests  into  a  compact  and  self- 
conscious  whole.  The  phenomenal  growth  of  the  fifties,  which 
menaced  the  economic  preponderance  of  the  South,  brought 
the  conflict  to  a  head.  The  South  possessed  if  anything  the 
greater  statesmen,  the  more  gifted  military  leaders  and  the  bet- 
ter  navy;  but  when  the  outlet  for  its  staple  crop  was  stopped 
up  by  the  civil  war  it  died  of  inanition  and  fell  a  victim  to 
the  economic  superiority  of  its  industriafly  diversified  and 
therefore  more  enduring  antagonist. 

It  took  the  South  a  generation  to  repair  the  ravages  of  the 
desperate  conflict,  but  with  the  beginning  of  the  new  genera- 
tion the  inevitable  results  appear.  Here  and  there  in  the 
South  the  march  of  industrial  capitalism  is  under  full  swing, 
and  the  conversion  of  the  handicraft  and  domestic  stages  into 
the   factory   system    is   proceeding   apace.     The    transition   in 


I04  Economic  Development  [§45 

several  of  Ihe  Southern  stales  is  bringing  lo  the  front  eco- 
nomic and  political  issues  which  agitated  New  England  a 
generation  or  two  earlier,  and  which  were  fought  out  in  old 
England  before  the  middle  of  the  century. 

In  the  North  the  post-bellum  period  witnessed  an  acceler- 
ation of  the  movement  which  had  so  auspiciously  begun. 
Notwithstanding  the  great  increase  of  industry  in  the  East,  the 
rapid  opening  up  of  the  far  West  and  the  application  of  capi- 
talist methods  to  the  exchange,  and  even  in  part  to  the  produc- 
tion, of  farm  products  so  stupendously  augmented  the  output 
that  the  prosperity  of  the  country  still  in  large  measure  rested 
on  its  agricultural  wealth.  Toward  the  end  of  the  century, 
however,  with  the  practical  exhaustion  of  tTie  free  land  which 
enjoyed  adequate  rainfall,  the  industrial  movement,  which  had 
been  gradually  creeping  farther  west,  now  furnished  a  con- 
tinually more  lucrative  opening  for  the  employment  of  the  fast 
accumulating  capital.  By  19 10  over  a  third  of  the  entire  pop- 
ulation lived  in  the  commercial  and  industrial  centres,  and 
almost  a  half  of  the  exports  consisted  of  manufactures. 

The  change  in  the  character  of  the  national  production,  and 
the  transition  from  agricultural  to  industrial  conditions,  are 
illustrated  by  the  tables  on  page  105.  On  the  table  facing 
page  104  will  be  found  the  details  of  the  chief  products  of 
the  United  States,  as  well  as  the  most  important  exports 
of  manufactures.  On  the  charts  opposite  pages  106-107 
and  108-109  will  be  found  statistics  of  the  growth  since  1850 
of  certain  agricultural  products  and  general  manufactures. 
It  will  surprise  many  to  learn  that  there  were  in  1910  nine 
classes  of  manufactured  products  each  aggregating  over  half 
a  billion  of  dollars  in  value  of  gross  product,  as  against  four 
agricultural  products  and  one  mineral  product. 

45.  Recent  Development  of  American  Industry 

This  vast  increase  in  capital  has  not  only  engendered  the 
transition  to  the  period  of  trusts  and  huge  corporations,  but 


\NNUAL    VALUE    OF   THE    MORE    IMI'ORIAN  T   J'KODUCTS 
(IN    MILLIONS).' 
Farm  Crops  Manufacturers 


Iron  and  Steel $i 

Slaughtering&Meat  Packing  i 
Foundry  &  Machine  Shop .      i 
Lumber  and  Timber     .    .      i 
Mens'  &  Womens'  Clothing 
Flouring  and  Grist  Mill   . 
Printing  and  PubHshing  . 
Cotton  Manufacturings   . 
Boots  and  Shoes   .... 
Woolen  Manufacture   .    . 
Tobacco  Manufacture  .    . 

Cars 

Malt  Liquor 

Leather  and  Leather  Goods 
Bread  and  Bakery    .    .    . 


VALUE    OF    EXPORTS   OF   MANUFACTURES 
(IN    MILLIONS) 


1900 

1910 

Zorn     .    . 

.    $828 

$1524 

tlay  .    .    . 

.     484  ■ 

748 

kVheat  .    . 

■      369 

695 

Cotton .    . 

•      323 

820 

3ats.     .    . 

•      217 

385 

Forest  Prod'ts   no 

Potatoes  . 

.       98 

188 

Orchard  Prod'ts  84 

Tobacco    . 

57 

91 

Wool  (190 1 

51 

72 

Mineral  Products 

Pig  Iron   . 

260 

439 

Coal.    .    . 

221 

628 

Copper .    . 

.        98 

145 

Gold.    .    . 

79 

100 

Silver    .    . 

•        76 

28 

Petroleum 

•        76 

131 

in 

■^iH 

kH 

0 

^  x« 

yi^'- 

w-^ 

,376 

$399 

.370 

169 

.228 

688 

.156 

648 

953 

447 

884 

116 

738 

536 

628 

257 

578 

180 

436 

153 

417 

240 

406 

206 

375 

278 

328 

80 

397 

158 

1890 


Iron  and  Steel  Manufactures 
Refined  Mineral  Oil  .  . 
Copper  Manufactures  . 
Leather  Manufactures  . 
Cotton  Manufactures  . 
Agricultural  Implements 

Chemicals 

Wood  Manufactures  .  . 
All  Manufactures  .  .  . 
Per  cent  of  Total  Exports 


$26 
45 


4 
5 
6 

151 
17.9 


5122 
68 
58 
27 
24 
16 


434 
31-7 


5179 
94 
88 

53 

28 
21 

14 

767 

4S-0 


^  Arranged  from  the  Tweljlh  Census  of  the  United  States  (Vol.  VII 
and  Abstract),  the  Statistical  Abstract  of  the  United  Slates,  and  The 
Mineral  Resources  of  the  United  States. 


§  45J  Recent  Growth 

PRODUCTIONS  OF  THE  UNITED  STATES 
(IN  MILLIONS) 


105 


Population  .  . 
Farm  Products 
Minerals  .  . 
Manufactures 


i8so 


23 
not  given 

$1,019 


1870 


39 
$1,958 
219 
4,232 


76 

$4,717 
1,107 

13,039 


92 
$8,926 

1,771 
20,672 


PERCENTAGE  OF  EXPORTS  OF  THE  UNITED  STATES 


Foodstuffs    .    . 
Crude  Materials 
Manufactures  .    . 


1850  187s 


20.43 
62.26 
17,21 


37-93 
41-31 
20.42 


35-59 
23-75 
32.91 


11-59 
3309 
44-85 


has  emphasized  the  national  and  international  significance  of 
the  modern  movement.  The  economic  unit  in  the  United 
States  is  fast  becoming  a  national  unit.  Industry  is  no  longer 
confined  to  the  old  local  limits.  Commercial  interests  have 
averstepped  the  boundaries  of  any  one  state.  Action  by  any 
one  commonwealth  inevitably  reacts  upon  its  neighbor.  Eco- 
nomic and  political  methods  framed  on  the  old  assumption 
that  business  is  local  are  bound  to  create  injustice  and  dis- 
satisfaction. Secondly,  the  transition  to  a  more  intensive 
capitalism  and  the  growth  of  industrial  exports  mark  the 
economic  as  well  as  the  political  maturity  of  the  country. 
The  acquisition  of  Porto  Rico  and  the  Philippines  is  more 
than  a  mere  accident.  The  foreign  market  is  becoming  an 
adjunct  to  our  industry  rather  than  to  our  agriculture;  it 
assumes  such  importance  because  our  economic  welfare,  so  far 
as  it  rests  upon  international  trade  at  all,  will  be  affected  more 
and  more,  not  by  what  the  foreigner  must  have  in  the  shape  of 
food,  but  by  what  he  can  be  persuaded  into  wanting  in  the 
shape  of  finished  products. 


io6  Economic  Development  [§46 

There  is,  however,  another  side  of  the  picture.  The  United 
States  has  so  rapidly  outgrown  the  swaddling  clothes  of  its 
infant  economic  surroundings,  and  has  stepped  with  such 
giant  strides  from  its  youthful  social  environment  to  the 
complex  conditions  of  a  full-grown  industrial  society,  that  the 
development  has  been  most  uneven.  America  presents  in 
some  respects  the  most  striking  contrasts.  It  is  at  once  the 
youngest  and  the  oldest  of  economic  societies.  It  is  the 
youngest,  in  the  sense  that  there  are  still  large  tracts  untouched 
by  plough  or  harrow,  awaiting  the  coming  of  the  first  settler  and 
needing  only  irrigation  to  convert  the  desert  into  a  garden.  It 
is  young  because  there  are  huge  sections,  only  one  step  removed 
from  the  primitive  economic  stage,  under  conditions  analogous 
to  those  which  the  old  world  faced  many  centuries  ago.  In 
another  sense,  however,  America  is  not  young,  but  old.  No- 
where on  the  face  of  the  globe  has  capital  been  applied  to 
productive  purposes  with  such  intensity  and  such  energy. 
Nowhere  has  man's  victorious  contest  with  the  powers  of 
nature  been  waged  with  such  intelligence  and  such  relentless 
vigor.  Nowhere  have  the  captains  of  industry  prosecuted 
their  quest  for  industrial  supremacy  with  such  alertness  and 
ability.  As  a  consequence,  nowhere  have  the  most  ad- 
vanced forms  of  a  highly  organized,  fully  differentiated,  thor- 
oughly complex  industrial  organism  been  evolved  with  such 
startling  rapidity  and  such  complete  success.  In  the  develop- 
ment of  these  new  economic  institutions  America  is  leading 
the  world  and  is  showing  other  countries  what  stages  they  have 
still  to  traverse.  While  the  movement  toward  combination  of 
capital  has  even  in  Europe  made  only  timid  beginnings,  it  is 
revolutionizing  American  industry.  In  this  sense  America  is 
old,  —  far  older  than  most  of  its  industrial  rivals. 

46.  Modern  Problems  of  America  j 

As  a  result  of  the  forces  just  described,  we  are  face  to  face 
with  two  sets  of  problems.     The  one  set  has  its  origin  in  the 


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§4^)]  Modern  Problems  107 

newer  and  less  developcfl  sections  of  llu-  counlry,  and  may  be 
illustrated  by  the  currency  question.  This  includes  far  more 
than  is  implied  in  the  term  itself.  It  involves,  in  large  sections 
of  the  West  and  the  South,  not  so  much  an  increase  of  the 
money  supply  as  a  rearrangement  of  the  economic  forces  and 
a  readjustment  of  the  relations  of  indebtedness  to  productive 
capacity.  With  every  shifting  of  the  frontier  farther  westward 
we  have  had  such  periodical  readjustments.  At  the  very 
beginning  of  our  national  life,  when  the  frontier  was  located  in 
western  Massachusetts,  came  the  economic  outbreak  known 
as  Shay's  Rebellion.  A  generation  later  similar  causes  produced 
on  the  new  frontier  the  troubles  which  culminated  in  the  stay- 
laws  of  Kentucky.  When  the  frontier  reached  the  Middle 
West  almost  half  a  century  later,  the  same  movement  assumed 
the  guise  of  the  fiat  money  craze.  Finally,  after  the  lapse  of 
another  generation,  when  analogous  economic  forces  worked 
out  their  result,  not  only  in  the  frontier  Hfe  of  the  West,  but 
also  amid  the  primitive  economic  conditions  of  large  sections 
of  the  regenerated  but  as  yet  undeveloped  South,  we  reach 
the  discussion  of  silver  currency  which  began  in  the  seventies 
and  culminated  in  the  nineties.  With  the  disappearance  of 
the  frontier  and  the  not  far  distant  industrial  awakening 
throughout  the  entire  South,  it  is  probable  that  the  money 
question  will  assume  as  subordinate  a  role  in  the  future  of  the 
United  States  as  it  has  assumed  in  the  advanced  countries  of 
Europe. 

On  the  other  hand,  the  second  set  of  problems  that  confront 
us  is  due  to  the  new  and  complex  industrial  conditions  of  the 
more  advanced  sections.  These  new  conditions  have  given  us 
the  corporation  problem,  the  wages  problem,  the  tax  problem, 
the  colonial  problem,  the  city  problem.  It  is  as  idle  to  inveigh 
against  the  policy  of  territorial  expansion,  on  the  ground  that 
such  a  scheme  was  not  contemplated  by  Washington,  as  it 
would  be  futile  to  object  to  the  regulation  of  combinations 
because  this  also  involves  a  new  departure.     In  the  one  case, 


io8  Economic  Development  [§46 

as  in  Ihe  other,  economic  conditions  have  arisen  which  were 
unknown  to  the  fathers,  and  which  require  for  their  solution 
a  new  analysis  and  a  new  method. 

What  is  peculiarly  confusing,  therefore,  is  the  fact  that  on 
the  one  hand  we  have  sections  where  the  economic  conditions 
are  of  a  primitive  type,  while  on  the  other  hand  in  numerous 
parts  of  these  sections  themselves  there  have  been  grafted 
upon  the  still  dominant  and  persistent  primitive  stock  the 
shoots  of  the  modern  industrial  type.  The  newer  methods  of 
transportation,  as  well  as  the  modern  media  of  exchange  and 
distribution,  have  superimposed  upon  the  simplicity  of  an 
undeveloped  agricultural  community  the  complexity  of  mod- 
ern industrial  enterprise.  The  consequence  is  that  eco- 
nomic conditions  of  the  country  are  supremely  heterogeneous, 
although  tending  to  become  homogeneous.  Because  of  this 
contest  of  the  old  with  the  new,  we  are  in  many  respects  still 
groping  in  the  dark,  dissatisfied  in  the  more  progressive  com- 
munities with  the  survivals  of  old  conditions,  and  trying  to 
discern  in  the  dim  light  of  the  future  the  final  expression  of 
the  newer  conditions  which  are  soon  to  become  universal. 


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CHAPTER  VIII 

DEVELOPMENT  OF  ECONOMIC  TH(JU(iHT 

47.   References 

J.  K.  Ingram,  A  History  of  Political  Economy  (1915);  L.  Cossa,  An 
Introduction  to  the  Study  of  Political  Economy  (tr.  by  L.  Dyer,  1893); 
L.  H.  Haney,  History  of  Economic  Thought  (191 1,  2d  ed.,  1920);  E.  Nys, 
Researches  in  the  History  of  Economics  (tr.  by  Dryhurst,  1899);  W.  J. 
Ashley,  Surveys  (1900),  263-309,  and  English  Economic  History.  I  (1888), 
ch.  iii,  II  (1893),  ch.  vi;  G.  O'Brien,  An  Essay  on  Mediaeval  Economic 
Teaching  (1920)  L  L.  Price,  Short  History  of  Political  Eionomy  in  Eng- 
land from  Adam  Smith  (1891);  E.  Cannan.  History  of  Thories  of  Produc- 
tion (3d  ed.,  1910),  chs.  ix  x  S.  N.  Patten,  Development  of  English 
Thought  (1899),  ch.  v;  C.  Gide  and  C  Rist,  A  History  of  Eronomic  Doc- 
trines since  the  Physiocrats  (tr.  by  Richards,  1914);  M.  Beer,  History  of 
British  Socialism  (2  vols,  1919-1920):  H  Eisenhart,  Ges'-hichte  der 
Nationalokononiie  (2d  ed.,  1891) ;  A.  Oncken,  C'srhichte  der  Nationalokon- 
omie,  I  (1902);  J.  Rambaud,  Histoire  des  Doctrines  Sconotniques  (1899); 
A.  Espinas,  Histoire  des  Doctrines  Sconomiques  (1900). 

48.  Economic  Theory  in  Classic  Antiquity 

It  has  often  been  said  that  economics  is  a  modern  science. 
In  point  of  fact,  it  is  only  modern  economics  that  is  a  modern 
science.  Every  economic  stage  which  has  been  marked  by 
any  scientific  thinking  at  all  has  had  its  own  economic  theory. 
The  stars  indeed  moved  for  aeons  before  man  thought  of  as- 
tronomy. So  economic  phenomena  existed  for  centuries  be- 
fore any  attempt  was  made  to  analyze  them.  Once  formulated, 
however,  the  economic  theory  of  any  period  is  usually  nothing 
but  the  reflex  of  its  economic  life. 

The  earliest  speculation  on  economic  phenomena  of  which 
we  have  any  knowledge  is  that  of  classic  antiquity.  Prior  to 
the  Greeks  we  find  only  ethical  exhortations  on  social  reform 
as  among  the  Oriental  nations,  or  practical  treatises  on  agron- 

109 


iio  Economic  Thought  [§48 

omy  as  among  the  Carthaginians.  But  both  Aristotle  and 
Xenophon,  to  mention  no  others,  wrote  distinct  treatises  on 
economics.  Greek  and  Roman  economic  life  was  not  only 
based  on  slavery,  but  never  outgrew  the  period  of  domestic 
industry  and  petty  trade.  This  explains  both  the  content 
and  the  omissions  in  Greek  and  Roman  economics.  Wealth 
existed,  and  we  find  the  term  discussed;  but  stress  was  laid 
primarily  upon  the  uses  to  which  it  might  be  put  by  the  indi- 
vidual. The  idea  of  value  was  apprehended,  and  the  distinc- 
tion between  utiUty  and  value  pointed  out;  but  no  further 
application  of  the  distinction  was  made.  Private  property  had 
long  been  known;  and  we  thus  find  interesting  theories  as  to 
its  origin  and  justification  as  against  the  dreams  of  the  com- 
munists, the  socialists  and  the  land  nationalizers,  who  flour- 
ished then  as  now.  Since  the  economic  conditions  were  such 
that  slave  labor  was  highly  productive,  slavery  was  defended 
as  a  natural  institution  and  as  compatible  with  the  highest 
morality. 

In  the  early  system  of  industry  the  relation  of  master  and 
slave  was  like  that  of  husband  and  wife,  of  parent  and  child; 
the  slave,  the  wife  and  the  child  all  belonged  to  the  household 
head;  their  labor  was  necessary  to  the  family  maintenance. 
When  in  later  centuries  the  economic  conditions  of  imperial 
Rome  made  slave  labor  less  productive,  it  is  significant  that 
the  writers  first  pointed  out  the  moral  shortcomings,  and  a 
century  or  two  later  the  economic  defects,  of  slavery.  In  the 
main,  however,  at  the  time  of  the  chief  prosperity  of  Greece 
and  Rome,  industrial  capital  did  not  exist  as  a  controlling  force 
in  production:  thus  neither  the  term  nor  the  idea  is  found; 
capital  is  not  yet  differentiated  from  wealth.  It  is  a  striking 
fact  that  Aristotle  seems  to  have  a  premonition  of  a  future 
industrial  system  when  he  says:  "If  the  combs  would  make 
the  web  close,  or  if  the  keys  of  themselves  struck  the  harp, 
masters  would  need  no  assistants  nor  slaves."  But  although 
capital  had  acquired  no  importance,  a  considerable  division  of 


§  48]  Theory  in  Antiquity  1 1 1 

labor  based  on  handicraft  industry  is  found  in  actual  life  and  is 
accordingly  discussed  in  the  economic  treatises. 

If  the  theory  of  production  was  simple,  that  of  distribution 
was  entirely  absent.  For  it  was  the  landowner  who  controlled 
the  processes,  and  owned  the  results,  of  production.  The  land- 
lord was  the  property  lord,  and  even  where  commercial  capital 
developed,  it  was  the  large  landowner  who  also  carried  on 
the  great  commerce.  Even  where  the  independent  tradei 
developed,  however,  his  gains  seemed  to  be  of  the  same  nature 
as  those  of  the  landowner.  There  was  thus  no  distinction  recog- 
nized between  land  and  capital,  as  factors  in  production.  The 
landlord,  again,  was  the  slave  owner;  there  was  thus  no  line 
drawn  between  land  and  labor,  and  no  theory  of  wages.  The 
doctrines  of  rent,  profits  and  wages  did  not  emerge,  because 
the  phenomena  themselves  did  not  exist  as  the  incomes  of 
separate  social  classes.  There  was  not  even  a  theory  of  indi- 
vidual income;  the  mass  of  property  yielded  indeed  a  return 
or  produce,  but  this  entire  produce  simply  went  to  swell  the 
property,  just  as  the  expenses  had  been  a  part  of  the  property. 
We  have  many  terms  for  property,  but  no  distinction  between 
produce  and  income. 

This  explains  also  the  classical  theory  of  interest.  Funds 
were  loaned  not  as  capital,  but  as  money.  So  far  as  there  was 
any  credit,  it  was  primarily  for  consumption;  that  is,  the  loans 
were  mere  personal  loans  made  to  tide  over  temporary  em- 
barrassment. Even  when  money  was  loaned  in  agriculture  or 
in  trade,  the  function  of  capital  was  not  understood,  because 
only  when  capital  is  used  in  industry  is  it  easy  to  realize  its 
productivity.  Interest  was  thus  regarded  as  paid  for  the  use 
of  money,  and,  as  money  is  in  itself  barren,  interest  was  deemed 
unjustifiable.  As  a  matter  of  fact,  the  interest  charged  on  such 
loans  did  often  have  the  effect  of  usury  and  frequently  resulted 
in  the  subjection  of  the  debtor  to  the  creditor.  In  the  absence 
of  industrial  capital  there  was  some  justification  for  the  theo- 
retic opposition   to  interest.     In   the   later  centuries  of  impe- 


I  I  2  Economic  Thought  [§  49 

rial  Rome,  when  commercial  capital  had  developed,  interest 
became  necessary;  but  it  was  then  defended  in  the  Roman 
code  by  virtue  of  a  legal  fiction,  not  on  economic  grounds. 

During  the  later  period  of  Greek  and  Roman  life  the  origi- 
nal barter  economy  had  given  way  to  a  money  economy. 
The  classic  writers  therefore  devote  some  attention  to  the 
theory  of  money.  The  whole  theory  of  price,  however,  was 
still  much  neglected,  because  trade  was  something  outside  of 
the  ordinary  activity  of  the  slave  plantation,  and  business  en- 
terprise had  but  little  scope  under  a  system  of  handicraft  in- 
dustry. It  is  thus  easy  to  understand  Aristotle's  and  Plato's 
condemnation  of  such  vocMions  as  something  "unnatural,"  or 
Cicero's  characterization  of  them  as  sordid  and  "unbecoming 
a  gentleman."  As  with  the  private  economy,  so  with  the 
public  economy.  The  revenues  of  government  were  derived 
chiefly  from  its  own  lands,  worked  in  the  same  way  as  in  any 
private  household.  Direct  taxes  were  unknown  except  in  ex- 
traordinary emergencies.  The  amassing  of  treasure,  not  the 
use  of  public  credit,  served  for  war  purposes.  Hence  the 
Greek  treatises  on  public  finance  deal  with  subjects  that  are 
almost  completely  absent  from  modern  works. 

Classic  antiquity,  in  short,  had  an  economic  theory  which  ex- 
plained its  economic  phenomena;  we  must  not  criticise  it  on  the 
ground  that  it  does  not  explain  our  phenomena. 

49.  Mediaeval  Economic  Theory 

After  the  intervening  centuries  of  mental  darkness  and  indus- 
trial stagnation,  economic  theory  began  anew  with  the  growth 
of  enterprise  in  the  twelfth  century.  The  new  theory  was  the 
outgrowth  of  the  new  economy.  The  typical  fact  of  this  new 
economy  was,  as  we  have  seen,  the  development  of  trade  and 
commerce,  no  longer  based  on  slavery.  The  great  problem  of 
mediaeval  economics  thus  became  the  problem  of  exchange 
value  and  how  to  make  this  new  kind  of  values  conform  to 
the  demands  of  justice.     Since  things  were  no  longer  made  to 


§  49]  Medieval  Theory  1 1 3 

be  consumed  at  home,  as  in  the  earher  centuries,  but  were 
now  made  to  sell,  the  question  arose,  for  what  shall  they  sell, 
or  what  is  the  proper  and  reasonable  price?  The  answer 
could  not  be  the  price  as  fixed  by  competition,  because  in  the 
mediaeval  economy  there  was  no  free  competition.  Goods 
were  produced  by  the  guilds,  but  the  guildsmen  could  not 
underbid  each  other.  Even  in  articles  which  came  from  out- 
side, to  take  advantage  of  one's  neighbor  by  purchasing  the 
wares  before  they  reached  market,  or  by  buying  at  wholesale 
to  sell  at  retail,  was  deemed  a  heinous  offence.  In  an  economy 
whose  keynote  was  production  to  order,  and  where  every  one 
did  just  what  his  father  had  done,  custom,  not  competition, 
fixed  the  price.  With  human  nature  as  it  is,  however,  men 
would  always  be  found  who  attempted  to  overreach  their 
neighbors.  Since  custom  could  not  be  relied  upon,  it  became 
necessary  for  government  to  step  in  and  to  regulate  the  price. 
In  point  of  fact,  when  mediaeval  prices  were  not  regulated  by 
custom,  they  were  fixed  by  statute. 

Economic  theory  thus  discussed  the  question:  what  is  the 
just  or  the  natural  price?  It  became  in  part  a  moral  question, 
even  though  the  answer  must  rest  on  economic  considerations. 
The  mediaeval  economists  were  no  longer  the  general  philoso- 
phers, as  in  classic  antiquity,  but  primarily  the  theologians. 
Economics  became  a  part  of  theology. 

In  framing  his  theory,  the  mediaeval  economist  had  to  take 
business  life  as  he  found  it.  The  characteristic  fact  of  mediae- 
val industry  was  the  free  laborer,  the  petty  guildmaster.  Slav- 
ery was  fast  disappearing,  and  accordingly,  with  the  exception 
of  a  few  of  the  early  authors  who  were  strongly  influenced  by 
the  newly  discovered  writings  of  Aristotle,  we  find  no  defence 
of  slavery.  Again,  since  the  whole  economy  was  now  based 
on  industry  and  trade,  the  classical  theory  of  business  as  an 
unnatural  pursuit  soon  disappeared.  Now  arose  the  question: 
how  should  business  gains  be  explained,  —  or,  in  other  words, 
what  fixes  the  price  of  the  finished  article? 
8 


I  1 4  Economic  Thought  [§  49 

There  could  be  only  one  answer  to  this  question.  Industrial 
capital  did  not  exist,  —  that  is,  not  as  an  important  or  typical 
fact.  Since  there  was  no  conception  of  capital,  there  could 
be  no  theory  of  profits.  The  guildmaster  employed  his  own 
work,  on  his  own  tools.  The  labor  expended  was  the  chief 
consideration;  and  cost  of  production  became  the  explanation 
of  the  reasonable  price,  and  the  guide  to  the  legislator  in  fix- 
ing tariffs.  To  carry  on  business  for  the  sake  of  making  gains 
was  therefore  still  deemed  immoral,  but  to  trade  in  order  to 
recover  the  result  of  one's  labor  was  justifiable.  Money  mak- 
ing as  such  is  wrong;  money  making  to  support  one's  self  or 
one's  family  by  the  proceeds  of  one's  industry  is  legitimate. 
All  through  the  middle  ages  the  economic  theory  objected  to 
a  man  charging  more  for  a  thing  than  it  was  worth,  or  buying 
a  thing  cheap  and  selling  it  dear,  or  selling  a  thing  at  a  higher 
price  for  credit  than  for  cash.  For  in  all  such  cases  it  was 
presumed  that  gains  were  made  without  any  actual  labor 
having  been  expended.  It  was  only  as  business  enterprise 
developed  that  the  other  constituent  elements  of  gain  were 
recognized;  but  the  theory  continued  to  include  them  in  the 
actual  labor  cost. 

The  other  great  mediaeval  theory  —  the  usury  doctrine  — 
may  likewise  be  put  under  the  head  of  exchange.  For  usury 
was  regarded  as  the  price  paid  for  the  use  of  money,  itself  the 
medium  of  exchange.  In  an  age  where  the  productive  em- 
ployment of  capital  was  unknown,  the  prohibition  of  interest 
did,  on  the  whole,  more  good  than  harm.  As  commercial 
capital  developed,  the  force  of  the  prohibition  was  weakened 
by  the  economic  theory  of  damnum  emergens  and  lucrum  ces- 
sans: if  the  lender  could  show  that  he  had  suffered  any  loss  or 
had  been  prevented  from  making  any  gains  through  not  having 
the  money,  he  might  charge  a  return.  The  wedge  was  slowly 
pushed  farther  in;  but  it  was  not  until  industrial  capital  had 
developed  at  the  close  of  the  middle  ages  that  a  distinction 
was  drawn  between  legitimate  interest  and  illegitimate  usury. 


§  49]  Mediaeval  Theory  i  i  5 

In  the  guild  system  proper,  where  no  capital  was  needed, 
interest  was  an  anachronism. 

The  only  other  economic  topic  that  was  discussed  in  addi- 
tion to  these  two  fundamental  points,  was  likewise  one  of 
exchange,  —  that  of  money.  Money  became  of  such  para- 
mount importance  that  we  find  the  treatment  of  money  prob- 
lems no  longer  confined  to  the  theologians,  but  participated  in 
by  specialists.  The  medieeval  writers  on  money  form  almost 
the  only  class  of  lay  economists,  pure  and  simple. 

Mediaeval  economic  theory,  therefore,  centered  about  the 
problems  of  exchange.  Production  was  so  simple  that  it  was 
not  discussed.  In  the  absence  of  capital,  there  was  no  ques- 
tion of  production  on  a  large  or  small  scale.  Since  the  pro- 
ductive process  was  a  unit,  there  was  not  even  a  discussion 
of  the  division  of  labor.  Problems  of  distribution  there  were 
but  few.  Since  there  was  no  industrial  capital,  there  were  no 
profits;  since  the  workman  was  in  the  main  his  own  employer, 
there  were  no  wages,  or  so  far  as  wages  were  paid,  they  were 
paid  by  the  consumer,  and  not  by  any  capitalist  employer. 
Even  though  the  conception  of  rent  to  the  landlord  now 
appeared,  the  land  was  not  normally  bought  and  sold,  and  the 
landlord's  rent  was  regarded,  not  as  a  separate  source  of  in- 
come, but  as  a  kind  of  property,  like  that  of  the  ordinary 
townsman.  Finally,  problems  of  consumption  attracted  little 
attention.  In  an  age  when  custom  reigned  supreme,  and 
when  unusual  expenditure  was  deprecated  as  ungodly,  the 
effects  of  social  expenditure  and  the  connection  between  social 
demand  and  production  were  so  slight  that  they  were  scarcely 
noticed. 

The  mediaeval  economists  therefore  were  confronted  with 
comparatively  simple  problems.  These  problems  they  attacked 
with  ability  and  with  some  degree  of  success.  It  was  not  long, 
however,  before  the  economic  conditions  changed,  bringing 
with  them  new  problems  and  fresh  atlenipls  at  analysis. 


1 1 6  Economic  Thought  [§  50 

50.    The  Mercantile  Doctrine 

Modern  economics  may  be  said  to  date  from  the  close  of 
the  sixteenth  century.  This  century  is  marked  by  one  great 
fact  which  could  not  have  failed  to  arrest  attention,  —  the 
revolution  in  prices  which  went  hand  in  hand  with  the  intel- 
lectual revolution  due  to  the  printing-press,  with  the  religious 
revolution  due  to  the  Reformation  and  with  the  political  rev- 
olution due  to  the  weakening  of  the  feudal  system.  The 
colonization  of  the  new  world  led  to  a  vast  influx  of  the 
precious  metals;  the  discovery  of  the  trade  routes  to  the  East 
opened  up  new  channels  of  commerce  and  revivified  industry; 
the  old  regime  of  customary  prices  slowly  gave  way  before  the 
new  force  of  competition;  the  guild  system  broke  down  as 
the  power  of  capital  made  itself  more  apparent  and  as  industrial 
conditions  outgrew  the  narrow  limits  of  the  local  economy. 
Thinkers  like  Bodin  in  France  and  Hales  in  England  began 
to  ponder  these  newer  conditions  of  economic  life  and  to 
discuss  the  relations  of  private  wealth  to  public  welfare.  The 
economic  theories  from  that  time  may  be  subdivided  into 
three  periods,  —  the  mercantile  theory,  which  first  sought  to 
crystallize  the  idea  of  the  national  economy;  the  theory  of 
Adam  Smith  and  Turgot,  which  represented  the  domination 
of  the  domestic  system  of  industry,  although  in  its  cosmopol- 
itan ideas  much  influenced  by  the  doctrines  of  the  Physiocrats; 
and  finally  the  Ricardian  theory,  which  marks  the  triumph  of 
the  factory  system. 

The  ■  mediaeval  thinkers  had  centred  their  attention  on  the 
money  supply,  and  had  used  every  endeavor  to  bring  the  pre- 
cious metals  into  the  town  and  keep  them  there  by  controlling 
each  individual  bargain  through  manipulating  the  exchanges, 
and  similar  devices.  The  newer  school  of  economists  still 
emphasized  the  importance  of  the  money  supply,  but  owing  to 
the  changing  conditions  of  trade  were  enabled  to  recognize 
the  futility  of  the  old  measures.     According  to  them,  a  surplus 


§  5oJ  Mercantile  Doctrine  I17 

of  coin  is  indeed  desirable,  but  it  can  best  be  secured  by  an 
excess  of  exports  over  imports  resulting  in  a  balance  of  trade 
rather  than  by  manipulating  the  exchanges  so  as  to  secure  a 
favorable  balance  in  each  particular  transaction  or  bargain. 
The  first  great  economic  controversies  were  those  between 
the  advocates  of  the  Balance  of  Bargain  and  Balance  of  Trade 
theories.  Because  of  their  insistence  on  this  mere  exchange 
of  merchandise,  the  newer  writers  are  usually  called  the 
Mercantilists. 

In  truth,  however,  this  was  only  an  incidental  result  of  their 
teachings.  The  breakdown  of  the  local  economy  and  its 
replacement  by  the  larger  unit  led  thinkers  to  search  for 
the  true  causes  of  national  wealth  and  national  greatness. 
They  saw  that  this  could  be  attained  only  by  an  increase  of 
national  production;  and  since  industrial  capital  was  now 
making  its  appearance,  they  emphasized  the  need  and  the 
value  of  national  industry.  Just  as  the  older  theory  was  dis- 
proved at  the  beginning  of  the  seventeenth  century  almost  at 
the  same  time  by  an  Englishman  (Mun),  a  Frenchman  (Mont- 
chretien)  and  an  Italian  (Serra),  so  the  practical  policy  of 
national  expansion  and  the  abolition  of  the  local  restrictions 
on  trade  and  industry  were  pursued  by  statesmen  like  Sully  in 
France,  Cromwell  in  England  and  later  by  Frederick  the 
Great  in  Prussia. 

Judged  from  the  present  point  of  view,  the  error  of  the  Mer- 
cantilists lay  in  confounding  a  balance  of  exports  over  imports 
with  a  surplus  of  production  over  consumption  (see  below, 
§211).  At  the  time  the  theory  was  first  formulated,  how- 
ever, an  increase  of  national  exports  was  indeed  the  most 
obvious  method  of  measuring  the  increase  of  national  produc- 
tion. In  the  early  stages  of  capitalist  enterprise  and  of  inter- 
national competition,  the  policy  of  national  protection  was 
suggested  as  a  means  of  national  industrial  growth;  but  this 
system  was  itself  an  advance  on  the  narrow  exclusiveness  of 
the  mediaeval  town.     The  Mercantilists  all  clamored  for  "Free 


I  1  8  Economic  Thought  [§  51 

Trade,"  but  their  free  trade  meant  a  freedom  of  exportation, 
and  a  liberation  of  internal  trade  from  the  trammels  of  the 
local  economy.  The  enlightened  Mercantilists  looked  upon  an 
abundant  money  supply  not  as  the  cause,  but  as  the  result,  and 
therefore  as  the  best  indication,  of  industrial  growth  and 
national  prosperity. 

The  problems  which  confronted  the  economists  of  the  seven 
teenth  and  first  half  of  the  eighteenth  century  were  thus  prin- 
cipally problems  of  production  and  exchange,  from  the  point 
of  view  of  the  relation  of  government  to  the  social  structure. 
Hence  the  term  political  economy  began  to  be  used,  and 
considerable  progress  was  made  in  analyzing  the  problems  of 
trade.  The  problems  of  distribution,  however,  were  only  just 
beginning;  the  domestic  system  of  industry  was  differentiating 
a  wages  class;  and  the  growth  of  industrial  capital  was  only 
slowly  bringing  into  view  the  recipients  of  profits  as  against 
the  recipients  of  the  rent  of  land.  The  slight  theory  that  we 
find  on  the  subject  is  incomplete  and  often  incorrect.  It  was 
difficult  for  the  writers  amid  these  half-developed  conditions  to 
go  beyond  the  surface  fact  that  low  wages  seemed  to  mean  low 
cost  and  therefore  successful  competition  with  other  countries. 
It  was  reserved  for  the  great  thinkers  toward  the  close  of  the 
eighteenth  century  to  voice  the  newer  ideas  on  production  and 
distribution  alike,  and  to  disclose  the  elements  of  public  pros- 
perity, suited  to  the  economic  age  in  which  they  wrote. 

51.  Adam  Smith  and  the  Physiocrats 

If  we  were  to  sum  up  in  two  phrases  the  real  contribution  of 
Adam  Smith  to  economics,  it  would  be  the  theory  of  cosmo- 
poUtanism  and  the  theory  of  distribution.  Of  these  the  one 
was  original,  the  other  partly  borrowed;  but  both  were  shaped 
by  his  economic  environment. 

The  statesmen  of  the  eighteenth  century  had  been  pushing 
the  Mercantilist  doctrines  to  an  extreme.  While  the  system  of 
national  economic  expansion  had  marked  an  advance  as  com- 


§  5i]  Adam  Smith  i  19 

pared  with  the  mediaeval  system,  the  time  soon  came  when  the 
centre  of  economic  interest  was  shifted  from  internal  to  exter- 
nal considerations;  and  when  what  had  seemed  liberty  from 
the  one  point  of  view  now  from  the  other  appeared  to  be 
restriction.  In  certain  countries  at  least  the  disadvantages  of 
the  system  came  to  outweigh  its  benefits.  Just  as  the  guild 
system  had  originally  been  a  spur  to  industry,  but  had  ulti- 
mately become  a  drag  upon  it,  so  the  mercantile  system  of 
regulation  changed  from  a  boon  to  a  drawback.  The  advance 
had  consisted  in  emphasizing  the  national  idea;  the  retrogres- 
sion consisted  in  accentuating  the  exclusive  idea.  In  the  well- 
meant  effort  of  the  legislator  to  further  industry,  he  often 
throttled  it.  The  government  now  interfered  with  everything, 
and  often  accomplished  less  than  nothing.  The  colonies, 
instead  of  strengthening  the  mother  country,  broke  loose 
entirely  or  weakened  her.  Trade  was  conducted  on  the 
principle  that  what  one  nation  gained  the  other  necessarily 
lost. 

The  very  expansion  of  international  relations,  however,  and 
the  immense  growth  of  the  foreign  market  induced  the  eigh- 
teenth-century thinkers  to  take  a  broader  view.  Adam  Smith 
and  the  Physiocrats,  each  influenced  by  the  doctrine  of  Natural 
Law,  endeavored  to  show  that  economic  phenomena,  like  all 
others,  were  reducible  to  principle.  The  most  important  cor- 
ollaries of  natural  law  were  to  them  private  property  qnd 
individual  liberty.  The  hberty  whose  economic  aspect  they 
emphasized  consisted  of  complete  freedom  in  internal  industry 
and  in  external  trade.  The  demand  for  freedom  of  industry 
no  longer  meant  freedom  from  the  action  of  local  government, 
but  freedom  from  the  action  of  national  government  as  well; 
the  demand  for  freedom  of  trade  no  longer  meant  liberty  of 
export,  but  liberty  of  import  as  well.  Just  as  it  was  recognized 
that  the  various  provinces  of  a  nation  benefited  from  freedom  of 
exchange  among  each  other,  so  it  was  claimed  that  the  various 
nations  of  the  world  would  equally  benefit.     Instead  of  national 


I  20  Economic  Thought  [§  51 

exclusiveness,  economists  demanded  cosmopolitan  freedom. 
Under  the  influence  of  the  natural  hiw  each  nation  would  then 
derive  its  maximum  advantage. 

This  importance  of  the  natural  law  of  freedom  in  economics 
was  emphasized  by  both  Adam  Smith  and  the  Physiocrats. 
Although  the  Physiocrats  were  first  in  the  field  with  the  pub- 
lished system  —  the  word  Physiocracy  denotes  "the  rule  of 
nature"  —  Adam  Smith  taught  the  identical  ideas  at  about  the 
same  time  in  his  lectures  at  Glasgow.  The  doctrine  of  cosmo- 
politanism was  in  the  air. 

The  other  great  theory  — •  that  of  distribution  —  we  owe 
primarily  to  the  Frenchmen;  not  so  much  indeed  to  the  Physi- 
ocrats as  to  the  great  statesman,  economist  and  philosopher, 
who  was  only  a  half-Physiocrat  himself,  —  Turgot.  The  leader 
of  the  Physiocrats  —  Quesnay,  the  court  physician  —  struck  by 
the  abyss  between  the  luxurious  noble  and  the  squalid  peasant, 
concluded  that  agriculture  was  the  only  source  of  wealth,  and 
the  peasant  the  only  productive  member  of  society.  In  an 
age  of  periodical  famine  the  food  supply  seemed  to  him  of 
transcendent  importance.  Turgot  only  half  accepted  this  idea; 
but  taking  his  cue  from  the  Physiocrats  with  their  idea  of 
natural  law  and  their  effort  to  trace  the  final  distribution  of  the 
wealth  created  by  the  farmer,  he  analyzed  industrial  society  as 
he  found  it,  and  saw  that  the  product  of  industry  was  divided 
into  separate  shares.  We  now  for  the  first  time  have  a  theory 
of  capital,  a  theory  of  rent,  a  theory  of  interest  and  profits,  a 
theory  of  wages. 

This  theory  was  adopted  and  developed  by  Adam  Smith. 
He  rejected,  indeed,  the  doctrine  of  the  Physiocrats  that 
agriculture  alone  yields  a  net  product.  On  the  contrary,  he 
generalized  the  conception,  and  maintained  that  all  industry 
might  yield  a  product.  Thus  we  often  speak  of  Smith  as  the 
founder  of  the  industrial  system  of  economic  theory  as  against 
the  agricultural  system  of  the  Physiocrats.  But  the  funda- 
mental doctrines  of  Smith  in  respect  to  the  laws  of  distribu- 


§  52]  Ricardo  1 21 

tion  were  similar  to  those  of  Turgot.  Both  Turgot  and  Smith 
lived  in  the  midst  of  the  domestic  system  of  industry.  This 
was  more  developed  in  England  than  in  France,  where  the 
abuses  of  the  guild  system  still  lingered  and  where  agricul- 
ture was  more  important  than  industry.  Thus  we  find  Turgot 
sharing  in  some  points  the  views  of  the  Physiocrats,  while  Adam 
Smith  was  able  in  part  to  cut  himself  loose.  Turgot  and  Smith, 
however,  attempted  to  explain  the  laws  of  rent,  profits  and 
wages,  because  now  for  the  first  time  the  capitalist  employer 
was  dififerentiated  from  the  landlord,  and  because  the  wages 
class  had  assumed  a  new  importance.  The  laborer,  however, 
still  controlled  the  process  of  production;  the  "manufacturer" 
with  Adam  Smith  is  still  the  manual  worker. 

Adam  Smith,  as  also  to  a  less  extent  Turgot,  may  therefore  be 
called  the  theorist  of  the  domestic  system.  He  differs  from  the 
Physiocrats  in  accentuating  the  industrial  rather  than  the  agri- 
cultural element  in  wealth  and  production;  but  he  agrees  with 
them  in  emphasizing  the  cosmopolitan  rather  than  the  national 
elements  in  public  wealth.  Because  of  this  broader  view  they 
both  attempt  for  the  first  time  to  study  the  whole  range  of 
relations  between  private  property  and  public  wealth,  between 
liberty  and  industry. 

52.   Ricardo  and  Modern  Ecouomics 

Adam  Smith  wrote  on  the  eve  of  the  industrial  revolution. 
It  has  often  been  observed  that  the  year  1776  marked  the 
publication  of  the  Wealth  of  Nations  and  the  Declaration  of 
Independence,  thus  voicing  the  demand  for  liberty  in  industry 
as  well  as  in  politics.  But  it  is  equally  worthy  of  note  that  the 
same  year  witnessed  Watt's  great  discovery  of  the  steam-engine. 
It  took  several  decades  for  this  and  other  great  inventions  to 
change  the  aspect  of  the  industrial  world;  but  in  less  than  half 
a  century  the  transition  had  been  accomplished  in  the  leading 
industries  of  England,  and  was  making  rapid  strides  in  the 
others.     In    France    the    process    had    scarcely    begun;     in    the 


122  Economic  Thought  [§52 

other  continental  countries  the  domestic  system  itself  was  still 
contesting  the  guild  system.  Hence  the  thinker  who  could 
analyze  the  new  system  of  industry  could  be  sought  for  only 
in  England,  for  in  no  other  country  did  that  system  exist. 
Ricardo  was  the  first  theorist  of  the  factory  system. 

It  is  no  mere  coincidence  that  Ricardo  should  have  been  a 
stockbroker.  This  man  of  genius,  whose  daily  life  trained  him 
to  observe  the  almost  perfect  sway  of  competition  and  the  well- 
nigh  complete  fluidity  of  capital  on  the  exchange,  was  well 
calculated  to  apply  these  considerations  to  a  wider  industrial 
world,  whose  characteristics  were  coming  to  be  those  of  free, 
competition  and  the  supremacy  of  capital.  Starting  with  a 
study  of  the  money  question,  Ricardo  ended  with  an  analysis 
of  industrial  society.  The  theories  of  cosmopolitanism  and 
liberty  he  took  from  Adam  Smith,  but  he  developed  them 
further,  because  this  theory  of  free  competition  seemed  to  be 
even  more  applicable  to  the  factory  system  than  to  the  domestic 
system.  The  former  theory  of  distribution,  however,  no  longer 
quite  sufficed.  The  manufacturer  was  now  not  the  manual 
worker,  but  the  employer  who  did  no  manual  work.  The 
"money  interest,"  which  in  Smith's  time  was  only  slowly 
forging  to  the  front,  was  now  becoming  the  dominant  factor  in 
English  life.  The  antagonism  between  land  and  capital  led  to 
a  new  analysis  of  rent  in  contrast  to  profits.  The  mass  of  the 
working  population  had  become  wage-earners,  but  England's 
growing  prosperity  seemed  to  rest  on  the  development  of 
capital.  Hence  the  law  of  wages  was  re-analyzed,  in  terms  of 
profit,  and  the  acme  of  truth  seemed  to  be  realized  in  the 
statement  that  wages  and  profits  vary  inversely  to  each  other. 
Moreover,  since  capital  had  now  assumed  a  new  importance  in 
the  shape  of  machinery,  the  study  of  capital  became  largely  a 
study  of  the  economic  effects  of  machinery.  Everywhere  in 
the  civilized  world  of  to-day  the  study  of  the  theory  of  indus- 
trial phenomena  goes  back  to  the  analysis  of  Ricardo. 
The    Ricardian    doctrines    themselves,    however,    have    been 


§52]  Modern  Economics  123 

modified  in  some  points  by  recent  investigation.  It  would  be 
surprising  if  the  century  that  has  elapsed  since  Ricardo  wrote 
should  not  have  brought  about  changes  in  conditions  which 
were  soon  reflected  in  theory.  In  some  respects  the  theories 
have  been  amplified  rather  than  altered.  The  economic  life  of 
the  last  half-century  has  been  marked  by  three  great  facts,  — 
the  increased  consumption  of  the  masses,  the  revolution  in  the 
means  of  transportation  and  the  tendency  of  capital  toward 
concentration.  The  changes  in  consumption  have  led  to  a 
deeper  analysis  of  the  central  problem  of  value,  especially 
through  the  efiforts  of  Jevons  and  the  Austrian  school.  The 
revolution  in  the  means  of  transportation  has  given  free  scope 
to  the  force  of  speculation,  and  has  led  to  its  more  careful 
study.  The  growth  of  capital  has  produced  not  only  large 
scale  industry,  but  integrated  industry,  and  has  brought  about 
a  closer  scrutiny  of  the  monopoly  problem. 

In  other  respects,  however,  the  theory  has  been  modified 
rather  than  amplified.  The  Ricardian  doctrine  of  free  compe- 
tition and  natural  liberty  had  two  important  practical  corolla- 
ries: the  one  as  applied  to  internal  affairs  meant  laissez-faire 
or  non-interference  by  government;  the  other  as  applied  to 
foreign  affairs  meant  free  trade.  The  experience  of  the  nine- 
teenth century  has  conclusively  shown  that  both  these  demands 
are  of  relative  rather  than  absolute  validity,  and  that  under 
certain  conditions  they  may  prove  detrimental  rather  than 
beneficent.  This  has  led  to  a  fresh  analysis  of  the  theories  of 
liberty  and  competition,  more  suited  to  the  modern  changes. 

Above  all,  however,  the  complete  triumph  of  industrialism, 
which  was  in  its  infancy  when  Ricardo  wrote,  has  brought  into 
clear  relief  many  tendencies  which  were  then  scarcely  discern- 
ible. Ricardo  had  elucidated  the  law  of  rent,  but  his  theory 
of  profits  was  incomplete,  the  connection  between  interest  and 
profits  dimly  appreciated,  and  the  relation  of  both  to  rent  not 
clearly  apprehended.  Above  all,  the  position  of  the  laborer 
and  the  relation  of  wages  to  profits  were  not  thoroughly  grasped. 


I  24  Economic  Thought  [§  52 

in  the  first  flush  of  the  new  regime  the  function  of  the  capitalist 
was  naturally  overestimated,  and  an  undue  emphasis  put  on 
production.  So  far  as  social  reform  was  deemed  at  all  practi- 
cable, it  was  thought  to  depend  on  the  prosperity  of  the  capi- 
talist and  on  the  care  taken  by  the  laborers  to  marry  late  and 
have  small  families. 

It  was  the  social  discontent  of  the  middle  of  the  century 
which  was  responsible  for  a  change.  Karl  Marx  did  an  admi- 
rable work  in  showing  the  essential  relativity  of  economic 
institutions  and  in  pointing  out  the  influence  of  economic  facts 
upon  social  and  political  life;  and  his  keen  criticism  of  existing 
theory  and  actual  society  did  much  to  bring  about  a  revision  of 
the  laws  of  distribution.  While  the  socialist  criticism,  however, 
was  fruitful,  its  constructive  analysis  was  erelong  seen  to  be  as 
one-sided  as  the  one  which  it  had  endeavored  to  replace.  It 
has  been  reserved  for  recent  economic  theory,  especially  in  the 
works  of  Marshall,  Walker,  Clark  and  their  followers,  to  take 
the  saner  view  and  to  show  how  and  why  social  progress  and 
the  growth  of  capital  are  intimately  bound  up  with  the  advance 
of  the  mass  of  the  workers.  Thus  the  modern  theory  of  eco- 
nomic life  fits  in  not  only  with  the  facts  of  the  business  world 
but  with  the  demands  of  social  reform.  The  economics  of 
to-day  has  finally  reached  the  stage  where  it  seeks  to  retain  the 
cold  impassivity  of  science  and  yet  to  reflect  the  warm  glow  of 
human  interests  and  living  ideals. 


Book  III 
Conditions  of  Economic  Life 


CHAPTER   IX 

PRIVATE  PROPERTY 

53.   References 


C.  Letourneau,  Property,  its  Origin  and  Development  (1901);  E.  de 
Laveleye,  Primitive  Property  (trans,  by  Marriott,  1878);  F.  de  Coulanges, 
Origin  of  Property  in  Land  (trans,  by  Ashley,  1891);  E.  Jenks,  History  of 
Politics  (1900),  ch.  x;  H.  S.  Maine,  Ancient  Law  (1880),  ch.  viii,  and 
Village  Comtnunities  (i88r),  Lects.  3,  6;  E.  Kelly,  Government  or  Human 
Evolution,  II  (1901),  bk.  i,  ch.  iii;  J.  S.  Nicholson,  Principles  of  Political 
Economy  (1893),  bk.  ii,  ch.  ii;  F.  W.  Maitland,  Domesday  Book  and  Be- 
yotid  (1897);  J.  H.  Lewinski,  The  Origin  of  Property  (1913);  R.  T.  Ely, 
Property  and  Contract  (1914);  T.  Veblen,  The  Instinct  of  Workmanship 
(1914),  ch.  v;  E.  Demolins,  Comment  la  Route  cree  le  Type  Social  (2  vols., 
1900-1903);  V.  G.  Simkhovitch,  "Hay  and  History"  in  Political 
Science  Quarterly,  vol.  xxviii.(i9i3). 

54.   Origin  of  Private  Property 

The  institution  of  private  property  lies  at  the  basis  of  modern 
economic  life.  It  has  become  so  ingrained  into  our  modes  of 
thought  that  we  commonly  regard  it  as  a  natural  right.  Never- 
theless private  property,  like  every  other  economic  institution, 
is  the  result  of  a  long  evolution.  It  is  a  relative  rather  than 
an  absolute  category. 

In  the  early  stages  of  society  the  conception  of  private  prop- 
erty is  absent.  Primitive  man,  like  his  brute  ancestor,  seized, 
but  soon  consumed,  his  articles  of  food.  Even  when  he  learned 
to  provide  for  the  morrow,  and  like  some  animals  to  accumu- 


I  26  Private  Property  [§  54 

late  a  store  of  provisions,  he  was  able  to  retain  control  of  them 
only  so  long  as  no  stronger  savage  came  his  way.  There  may 
have  been  temporary  possession,  there  was  no  recognized 
ownership.  The  earliest  idea  of  property  as  distinct  from 
possession  was  communal,  not  private.  As  the  human  hordes 
roamed  about  from  place  to  place  in  the  quest  of  food,  they 
came  to  regard  certain  sections  as  their  particular  preserves, 
into  which  no  other  savages  were  admitted.  Appropriation 
and  user  thus  became  the  germs  of  property;  but  it  was  social 
and  not  individual  user.  As  concerted  action  was  generally 
necessary  in  order  to  secure  subsistence,  the  food  was  distrib- 
uted according  to  definite  rules  by  the  representatives  of  the 
group.  Even  religious  objects,  like  sacred  stones  and  feathers, 
were  preserved  by  the  group  as  a  whole. 

The  first  type  of  private  property  is  found  in  the  ornaments 
and  the  scanty  articles  of  clothing.  These  were  almost  from 
the  outset  regarded  as  an  integral  part  of  the  personality  of 
the  individual.  The  next  step  was  reached  when  certain 
weapons  were  taken  out  of  the  general  stock  and  associated 
with  the  exceptional  prowess  of  some  member  of  the  group. 
The  weapons,  like  the  ornaments,  were  supposed  in  some  way 
to  reflect  the  personality  of  the  individual,  and  when  he  died 
they  were  usually  burned  or  interred  with  his  remains.  As 
civilization  reached  a  higher  stage,  the  movable  shelters  or 
wigwams  and  the  scanty  stock  of  tools  and  utensils  were  re- 
tained in  the  ownership  of  individuals.  We  can,  however, 
scarcely  yet  speak  of  any  differentiation  of  private  property. 
Its  social  importance  was  insignificant  in  the  extreme,  and 
there  was  no  motive  for  accumulation.  After  a  narrow  limit 
had  been  reached,  additional  ornaments  became  a  burden,  more 
weapons  and  tools  were  valueless.  The  group,  not  the  individual, 
efforts  were  still  the  controlling  factors  in  the  economic  life. 

The  decisive  step  was  taken  with  the  domestication  of  ani- 
mals. As  soon  as  it  was  discovered  how  to  preserve  flocks 
and  herds,  it  was  possible  for  the  individual  to  dissociate  his 


§54]  Origin  127 

economic  life,  to  a  small  extent  at  least,  from  that  of  the  group, 
and  by  giving  freer  rein  to  his  own  powers  to  start  on  the  path 
of  independence  and  prosperity  for  himself  and  his  own  imme- 
diate circle.  Private  property  now  assumed  a  position  of 
increasing  importance:  it  created,  as  we  have  seen,  the  patri- 
archal family,  and  it  engendered  the  distinction  of  rich  and 
poor.  Wealth  now  consisted  of  flocks  and  herds;  personal  be- 
longings in  the  shape  of  jewelry  and  treasure  were  prized  not 
only  for  themselves  but  because  they  could  be  bartered  for 
live  stock.  The  original  "chattels"  are  the  "cattle."  Human 
dependents,  moreover,  were  needed  to  care  for  this  increasing 
wealth:  the  wives  and  the  children  of  the  patriarchal  head 
were  regarded  as  his  private  property,  and  where  even  these 
did  not  suffice,  we  find  the  beginnings  of  slavery.  The  slave 
(famel)  soon  became  the  most  important  element  in  the  family. 
On  the  other  hand,  there  was  no  private  appropriation  of  land, 
because  it  was  unnecessary.  The  herdsmen  wandered,  accord- 
ing to  seasonal  or  climatic  conditions,  in  search  of  fresh  pastures, 
and  the  tribal  customs  were  still  sufficiently  strong  to  prevent 
individuals  from  appropriating  particularly  favored  spots  in 
the  general  area. 

Two  points  thus  stand  out  clearly.  First,  private  property 
consisted  for  a  long  time  only  of  movables,  animate  or  inani- 
mate, that  is,  of  animals,  human  beings,  and  personal  chattels. 
A  community  which  is  continually  on  the  march  cannot  de- 
velop property  in  immovables.  Secondly,  the  origin  of  private 
property  is  to  be  sought  in  user  and  seizure.  Compulsion  and 
even  rapine  are  frequently  the  starting-points  of  the  accumula- 
tion of  wealth.  Yet  this  selfish  accumulation  is  the  means  of 
attaining  a  higher  stage  of  welfare  for  the  community  as  a 
whole.  It  increases  not  only  production  but  civilization.  The 
ethical  stage  of  a  pastoral  tribe  is  superior  to  that  of  a  group 
of  hunters.  The  institution  of  private  property,  while  intensi- 
fying many  of  the  unlovely  characteristics  of  human  nature,  is 
also  responsible  for  those  qualities,  like  thrift,  foresight,  fru- 


128  Private  Property  [§55 

gality,  energy,  sobriety  and  sanity,  without  which  no  enduring 
progress  was  possible.  Property  was  becoming  private,  but 
since  the  individual  was  still  in  large  measure  controlled  by 
the  group,  the  sanction  of  private  property  remained  social 
in  character.  The  individual  was  permitted  to  enjoy  private 
property  because  it  was  recognized  to  be  conducive  on  the 
whole  to  the  interests  of  the  group.  From  the  very  beginning, 
therefore,  out  of  evil  there  came  good;  out  of  the  violence 
inseparable  from  early  private  property  there  evolved  the 
orderliness  of  a  stable  society. 

55.   Growth  of  Property  in  Land 

The  next  step  was  taken  when  the  developed  agricultural 
stage  was  ushered  in.  This  had  two  important  results:  it 
greatly  extended  slavery,  and  it  created  private  property  in 
immovables.  It  extended  slavery,  because  profitable  cultiva- 
tion of  the  soil  was  contingent  upon  an  adequate  labor  force. 
Compulsory  and  gratuitous  labor  would  naturally  swell  the  gains 
of  the  owner.  Increasing  agriculture  involved,  under  certain 
conditions  at  least,  increasing  private  property  in  slaves. 

It  also  involved  the  creation  of  private  property  in  im- 
movables. As  fixed  settlements  replaced  the  early  temporary 
abodes,  the  need  and  utility  of  more  durable  habitations  be- 
came evident.  Private  property  in  houses,  however,  rendered 
possible  on  a  much  larger  scale  the  accumulation  of  personal 
belongings  within  the  house,  and  this  accumulation  of  wealth 
was  brought  about  by  the  increased  earnings  of  agriculture  as 
contrasted  with  flock  tending.  The  evolution  of  private  prop- 
erty in  land,  however,  was  far  slower  than  in  the  case  of  houses. 
In  a  few  instances,  where  geographical  and  climatic  reasons 
made  it  difficult  for  the  pastoral  group  to  eke  out  a  living  in 
common  from  the  soil,  as  in  Norway,  and  where  there  was  less 
fear  of  attack  from  organized  bands  of  marauders,  the  indi- 
viduals started  out  as  farmers,  each  for  himself  and  each  appro- 
priating as  much  of  the  land  as  he  needed.     User  soon  hardened 


§  55]  Property  in  Land  i  29 

into  ownership.  So  also  when  new  colonies  were  planted  by 
the  offshoots  of  communities  long  acquainted  with  agriculture, 
the  colonists,  as  in  America,  naturally  brought  with  them  the 
practice  of  individual  land  ownership  and  separate  holdings. 
In  most  places,  however,  where  the  grazier  slowly  turned  into 
a  farmer,  the  communal  practices  disappeared  only  by  slow 
degrees.  Just  as  the  nomad  group  had  pitched  its  tents  together 
and  had  allowed  the  flocks  to  graze  in  common,  so  now  the 
village  houses  were  grouped  and  separate  plots  of  land  in  the 
surrounding  area  were  temporarily  assigned  to  the  cultivators. 
These  temporary  assignments  of  different  grades  soon  become 
permanent,  although  the  method  of  using  them  was  strictly 
subject  to  communal  needs.  For  as  population  increased 
and  the  holdings  were  subdivided,  the  different  grades  of  land 
were  carved  up  into  strips,  the  same  individual  often  possess- 
ing sections  in  different  parts  of  the  arable  area.  This  system 
of  intermixed  strips  necessitated  a  whole  body  of  communal 
rules  in  order  to  insure  a  proper  cultivation.  The  strips  were 
too  small  to  be  fenced  off.  In  the  open-field  system,  as  it  was 
therefore  called,  not  only  was  it  clearly  inadmissible  for  one 
man  to  use  his  strip  as  pasture  with  the  risk  that  his  animals 
might  stray  on  the  cultivated  plot  of  his  neighbor,  but  in  addi- 
tion far  better  results  were  obtained  by  planting  large  areas  in 
the  same  way.  Thus  the  mediaeval  village  community  or  mark 
was  based  on  the  idea  of  common  cultivation,  and  the  original 
community  of  property  was  long  preserved  not  only  in  the 
forests,  the  free  use  of  which  under  certain  restrictions  belonged 
to  every  member  of  the  group,  but  also  in  the  pasture  land, 
where  every  one  had  the  right  to  graze  his  cattle,  and  even  in 
the  arable  land  which,  after  the  crops  were  taken  of?,  reverted 
to  communal  use. 

While  private  property  in  land  within  the  group  was  thus 

developing,    there   was   another   element    at    work,    proceeding 

from  above  rather  than  from  below.     As  the  conquering  tribes 

seized   upon   fresh   tracts,   it   became   of   signal   importance   to 

9 


130  Private  Property  [§55 

defend  the  settled  agricultural  possessions.  This  duty  was 
assigned  to  the  military  chieftains,  who  in  many  cases  were 
the  wealthiest  flock-owners.  With  the  transition  to  agricul- 
ture, the  old  personal  and  tribal  relations  gave  way  to  territorial 
and  political  relations.  In  other  words,  the  state  developed 
and  the  local  divisions  and  counties  were  put  under  the  pro- 
tection of  the  over-lords.  The  tenants,  or  vassals,  whether 
individuals  or  groups,  now  paid  a  portion  of  their  agricultural 
earnings  as  the  price  of  protection,  and  the  military  occupa- 
tion of  the  district  by  the  chieftain  before  long  hardened  into 
the  institution  of  private  property.  The  war  lord  became 
the  landlord.  The  marquis  was  originally  the  defender  of  the 
"March."  The  property  rights  of  the  cultivator  were  held  to 
be  subordinate  to  those  of  the  lord.  Thus  was  ushered  in 
the  system  of  feudalism,  based  on  the  pteponderance  of  the 
manorial  lord  and  the  hierarchy  of  social  relations. 

In  some  cases  the  cultivators  lost  their  original  prerogatives 
and  dwindled  into  mere  tenants  without  any  property  rights 
at  all.  In  other  cases  they  contrived  gradually  to  free  them- 
selves from  their  rents  and  other  feudal  payments,  while  at 
the  same  time  the  common  cultivation  gave  way,  under  the 
impulse  of  more  modern  methods,  to  individual  tillage.  In 
this  manner  was  formed  the  peasant  proprietorship  of  many 
European  countries.  The  land  became  thus  the  private  prop- 
erty of  either  the  lord  or  the  peasant,  until  finally  with  the 
development  of  industrial  capitalism  real  estate  was  put  on  an 
equality  with  personal  property.  In  America  and  many  parts 
of  Europe  land  is  now  bought  and  sold  almost  •  as  readily  as 
any  kind  of  chattels. 

Here  again  we  notice  the  social  sanction  of  private  property. 
The  origin  of  property  in  land  as  of  that  in  flocks  was  often 
connected  with  force  and  fraud,  but  in  this  case  as  in  the  other 
the  community  as  a  whole  was  benefited.  The  private  prop- 
erty of  the  feudal  chieftain  meant  the  growth  of  security  and 
social  order,  which  formed  the  foundations  of  increased  pro- 


§  56]  Theories  i  3  i 

duction.  The  development  of  landed  property  within  the 
communal  group  of  cultivators  was  the  result  of  the  recogni- 
tion of  the  social  importance  of  individual  action.  As  long 
as  common  cultivation  brought  about  the  best  utilization  of 
the  fields,  it  remained  the  prevalent  system;  but  when  in  more 
recent  periods  the  opportunity  of  raising  hay  made  a  more  inten- 
sive cultivation  possible,  the  advantages  of  a  more  individual 
method  were  soon  manifest.  The  old  common  or  open  fields 
were  now  enclosed,  and  each  landowner,  freed  from  what  had 
become  the  shackles  of  a  common  cultivation,  turned  his  own 
plot  to  the  best  use.  Private  property  in  land  thus  reached 
its  climax,  because  it  carried  with  it  individual  freedom  for 
use.  The  augmented  agricultural  profits  were  due  to  increased 
production,  so  that  private  property  here  again  redounded 
in  the  main  to  the  advantage  of  the  community.  Real  estate 
like  personalty,  immovables  like  movables,  have  become  pri- 
vate property  because  of  the  recognition  by  society  of  the 
social  advantages  of  individual  ownership. 

56.  Theories  of  Private  Property 

Two  important  corollaries  follow  from  what  has  just  'been 
said:  first,  the  justification  of  private  property  is  its  social 
utility,  and  second,  the  extent  of  private  property  rights  must 
always  be  limited  by  their  social  consequences. 

The  earliest  theory  of  private  property  as  found  in  some  of 
the  Roman  writers  is  the  occupation  theory.  The  doctrine 
that  property  belongs  of  right  to  him  who  first  seizes  it  is,  how- 
ever, one  that  can  apply,  if  at  all,  only  to  the  earliest  stages  of 
development.  Where  no  one  has  any  interest  in  the  property, 
no  one  will  object  to  the  assertion  of  a  claim  by  a  new-comer. 
When  property  is  without  any  discoverable  owner,  we  still  to- 
day assign  it  to  the  lucky  finder.  But  when  the  property  is 
already  utilized  by  others,  whether  as  groups  or  as  individuals, 
or  when  the  property  is  newly  created  by  human  effort,  the 
assertion  of  the  right  of  occupation  involves  a  theory  of  force 


132  Private  Property  [§56 

ralher  than  of  juslitc.  The  occupalioii  theory  may  cxphiin 
how  the  present  legal  title  to  certain  lorms  of  property  origi- 
nated; it  cannot  serve  as  a  justification  of  private  property, 
except  in  the  rare  case  of  previously  unoccupied  or  unutilized 
wealth.  The  mere  fact  that  a  person  has  seized  a  thing  is  no 
reason  why  he  should  retain  it. 

The  next  doctrine  was  the  natural  rights  theory.  Private 
property,  so  we  were  told  by  the  philosophers  of  antiquity 
and  the  publicists  of  the  later  middle  ages,  is  a  natural  right,  a 
part  of  the  law  of  nature.  It  will  at  once  be  asked,  however, 
what  is  denoted  by  nature?  If  by  nature  we  mean  the  physical 
and  animal  world  outside  of  man,  it  is  clear  that  the  only  laws 
of  nature  are  the  laws  of  the  necessary  relations  of  phenomena 
and  that  the  only  natural  right  is  that  which  flows  from  the  law 
of  might 'or  of  the  power  which  explains  these  phenomena.  In 
this  sense  all  civilization  is  an  endeavor  to  escape  from  the 
original  reign  of  natural  law  among  brutes.  Nature  is  here 
opposed  to  human  progress.  Private  property,  then,  is  un- 
natural because  it  is  not  found  in  a  state  of  nature.  If,  on  the 
other  hand,  by  nature  we  mean  the  constitution  of  the  entire 
universe,  including  man,  and  if  it  is  contended  that  private 
property  is  natural  in  the  sense  that  it  is  necessary  to  the  full 
self-realization  of  the  individual  as  the  bearer  of  the  world  idea, 
the  obvious  rejoinder  is  that  we  are  applying  the  term  natural 
right  to  our  temporary  idea  of  what  ought  to  be  right,  and  that 
history  unmistakably  shows  a  continual  change  in  our  ideas  of 
what  ought  to  be.  The  great  philosophers  of  antiquity  upheld 
private  property  in  slaves  as  a  natural  right.  Much  of  what 
we  to-day  consider  natural,  our  descendants  will  deem  un- 
natural. Our  conception  of  nature  in  this  sense  is  essentially 
ephemeral  and  mutable. 

Driven  from  this  position,  the  natural  rights  school  took 
refuge  in  the  labor  theory,  and  maintained  that  the  real  title  to 
private  property  is  derived  from  the  toil  and  trouble  experi- 
enced in  creating  it.     Surely,  it  will  be  said,  a  thing  belongs  of 


§  56]  Theories  i  3  3 

right  to  him  who  produces  it.  But  at  once  comes  the  reply: 
no  one  has  created  the  land.  As  a  consequence,  we  find  thinkers 
of  all  ages,  from  Phaleas  of  antiquity  to  the  disciples  of  Henry 
George  to-day,  who  contend  that  private  property  in  land  is 
unjust,  while  maintaining  that  private  property  in  everything 
else  is  defensible.  These  critics,  however,  overlook  the  fact 
that  the  difference  between  land  and  so-called  labor  products 
is  in  this  respect,  at  all  events,  one  only  of  degree,  because 
nothing  is  the  result  of  individual  labor  alone.  The  carpenter, 
it  is  said,  rightfully  owns  the  table  which  he  has  made.  But 
to  what  extent  has  he  made  it?  The  tree  which  affords  him 
the  raw  material  was  not  created  by  him;  the  axe  with  which 
the  tree  is  felled  is  the  accumulated  result  of  centuries  of  inven- 
tion expended  by  his  ancestors;  the  stream  along  which  the 
log  is  floated  is  not  of  his  making.  To  pass  over  all  the  other 
intermediate  processes,  how  long  would  he  be  secure  in  the 
possession  of  the  tools  he  has  used  or  of  the  product  he  has 
finished,  were  it  not  for  the  protection  afforded  to  him  by  the 
law?  And  finally,  of  what  use  would  the  tables  be  unless  there 
were  a  demand  for  them  on  the  part  of  the  community?  The 
value  of  the  table  is  as  little  the  result  of  individual  labor  as  is 
the  value  of  the  land.  Society  holds  a  mortgage  over  every- 
thing that  is  produced  or  exchanged. 

Since  therefore  neither  occupation,  natural  law  nor  labor 
gives  an  indefeasible  title  to  private  property,  some  philoso- 
phers were  led  to  frame  the  so-called  legal  theory  of  private 
ownership  which  is  in  essence  that  whatever  is  recognized  as 
such  by  the  law  is  rightfully  private  property.  Obviously,  how- 
ever, this  is  not  an  economic  doctrine.  Good  law  may  be  bad 
economics.  The  law  generally  follows  at  a  respectful  distance 
behind  the  economic  conditions,  and  adjusts  itself  gradually  to 
them.  The  legal  theory  tells  us  what  property  is,  not  why  it  is, 
I  nor  what  it  should  be. 

Thus  we  are  finally  driven  to  the  social  utility  theory.  This 
is  really  implied  in  the  preceding  theories  and  supplies  the  link 


I  34  Private  Property  [§  57 

that  binds  them  all  together.  In  ancient  as  in  modern  com- 
munities, the  individual  is  helpless  as  against  society,  however 
much  under  modern  democracy  society  may  see  fit  to  extend 
the  bounds  of  individual  freedom.  If  we  allow  the  individual 
to  seize  upon  unoccupied  wealth,  if  we  recognize  the  existence 
of  certain  rights  in  what  are  deemed  to  be  the  products  of 
labor,  if  we  throw  the  mantle  of  the  law  around  the  elements 
of  private  property,  —  in  every  case  society  is  speaking  in  no 
uncertain  voice  and  permits  these  things  because  it  is  dimly 
conscious  of  the  fact  that  they  redound  to  the  social  welfare. 
Private  property  is  an  unmistakable  index  of  social  progress. 
It  originated  because  of  social  reasons,  it  has  grown  under  con- 
tinual subjection  to  the  social  sanction.  It  is  a  natural  right 
only  in  the  broad  sense  that  all  social  growth  is  natural. 

57.   Limits  of  Private  Property 

If  then  social  utility  is  the  real  justification  of  private  prop- 
erty, it  is  clear  that  the  extent  of  private  property  rights  must 
find  its  limit  in  social  considerations.  Take,  for  example,  the 
modern  problem  of  irrigation.  The  English  common-law 
conception  of  private  property  —  the  property  that  reaches, 
as  has  been  picturesquely  said,  from  heaven  to  hell  —  is  a 
product  of  a  moist  climate,  of  conditions  where  there  is  an 
abundance  or  superabundance  of  water,  and  where  private 
interest  could  be  safely  depended  upon  to  give  the  best  results. 
But  in  the  arid  and  semi-arid  regions  of  our  western  empire 
neither  occupation  nor  labor  is  deemed  to  give  an  equitable 
title  to  the  river  or  the  adjacent  riparian  lands.  The  new 
code  of  private  property  which  is  springing  up  in  the  West  is 
one  in  which  individual  rights  are  clearly  and  forcibly  held 
subservient  to  those  of  the  community. 

What  is  true  of  irrigable  land  in  the  West  is  true  in  varying 
degree  of  many  forms  of  private  property  in  the  East.  "May 
I  not  do  as  it  listeth  me  with  my  own?"  is  a  cry  far  less  fre- 
quently  heard   than   of  old.      Private  property  as   a   concept 


§57]  Limits  135 

will  no  doubt  always  remain;  but  the  content  of  the  concept  is 
continually  changing.  Property  in  human  beings  was  at  one 
time  considered  economically  advantageous  and  morally  defensi- 
ble. Private  ownership  of  the  highways  was  not  so  long  ago 
usual  and  justifiable.  In  the  city  of  New  York  to-day  the  proc- 
ess of  extinction  of  private  property  in  docks  is  fast  going  on. 
On  the  other  hand,  the  stealing  of  electricity  or  the  tapping  of  a 
telegraph  or  telephone  wire  is  at  present  punishable  as  theft.  If, 
as  Carlyle  tells  us,  no  one  believes  what  his  grandfather  believed, 
we  may  almost  say  that  no  one  owns  what  his  grandfather  owned. 

The  right  of  private  property  is  a  privilege  conferred  upon 
individuals  by  society.  It  is  recognized  as  beneficial  in  general 
because  of  the  consensus  of  opinion  that  in  the  main  better 
economic  results  can  be  secured  by  the  application  of  the  prin- 
ciple of  self-interest.  In  the  present  stage  of  the  evolution  of 
human  nature,  private  property  constitutes  the  chief  incentive 
to  better  and  greater  production.  The  test  therefore  is  always 
the  social  test.  Where,  however,  the  reason  of  the  rule  fails, 
the  rule  itself  must  fail.  That  is,  w'here  in  certain  cases  the 
results  of  private  property  are  clearly  opposed  to  the  social 
interests,  society  is  justified  in  restricting  the  extent  of  the 
property  right.  Thus  the  private  ownership  of  patents  and 
copyrights  is  everywhere  granted  only  for  a  term  of  years,  the 
right  of  the  owner  thereafter  lapsing  in  favor  of  society  at 
large.  Again,  while  property  in  land  is  in  general  beneficial, 
immense  private  holdings  may  sometimes  check,  rather  than 
further,  social  progress;  and  may  lead  to  weU-considered  move- 
ments either  to  restrict  their  size,  as  in  New  Zealand,  or  to  alter 
the  form  of  the  property  right,  as  in  the  recent  Irish  legislation 
intended  to  convert  the  tenant  into  a  peasant  proprietor. 

Interference  with  the  existing  rights  of  private  property 
must  always  depend  upon  a  convincing  and  irrefragable  evi- 
dence of  its  necessity.  For  in  the  main  private  properly  and 
individual  liberty  have  been  the  correlative  products  of  human 
civilization.     The   limits   of   economic   freedom   and   economic 


136  Private  Property  [§58 

competition  which  we  shall  discuss  in  the  following  chapters 
will  throw  light  upon  the  bounds  of  private  property.  We 
shall  see  that  the  maintenance  of  property  rights  depends  on 
the  existence  and  the  beneficence  of  competition.  Where 
competition  has  given  way  to  monopoly,  the  automatic  control 
of  property  rights  must  be  replaced  by  a  more  positive  social 
control.  Again,  when  the  condition  of  equality,  which  under- 
lies the  theory  of  competition,  is  absent,  competition  may 
lose  its  beneficent  force  and  the  economic  interests  of  society 
may  demand  the  fixing  of  a  limit  to  the  exercise  of  private 
property  rights.  Certain  idealists  would  go  much  further  and 
advocate  communism  or  socialism.  The  communist  demands 
the  complete  abolition  of  all  private  property;  the  socialist 
asks  for  the  abolition  of  private  property  in  the  means  of  pro- 
duction while  retaining  it  in  articles  of  consumption.  Both 
are  so  extreme  that  in  their  well-meant  endeavor  to  rectify 
undoubted  abuses,  they  would  forego  the  chief  advantages  and 
concomitants  of  modern  civilization  itself. 

58.   Content  of  Property  Rights 

Property  rights  may  be  classified  under  five  heads:  the  right 
of  gift,  the  right  of  disposition  by  contract,  the  right  of  use, 
the  right  of  bequest,  the  right  of  unlimited  acquisition.  Of 
these  the  first  and  second  are  well-nigh  unquestioned.  A 
man  may  not  only  give  away  his  property  as  he  chooses,  but 
he  may  sell,  lease,  loan  or  pawn  it.  It  is  only  where  rem- 
nants of  the  old  feudal  law  of  real  estate  survive  that  we  find 
any  limitation  put  upon  such  rights.  The  third  right  is  some- 
what less  absolute.  As  against  the  doctrine  of  "vested  rights" 
of  private  property,  the  theory  of  "eminent  domain"  forms 
the  entering  wedge  of  social  control  which  is  being  continually 
pushed  further  in  by  the  principle  of  public  policy.  Again, 
a  man  may  commonly  use  his  property  as  he  likes.  But  he  may 
not  use  it  in  such  a  way  as  to  create  a  nuisance  to  his  neigh- 
bor.    The  individual  right  is  subject  to  social  restrictions. 


§  58]  Content  137 

II  is,  however,  around  the  fourth  and  fifth  heads  that  the 
chief  controversy  has  taken  place.  The  right  of  bequest  or 
inheritance  is  one  of  late  growth.  Long  after  private  property 
was  instituted  its  existence  lapsed  with  the  death  of  the  original 
owner  and  the  property  itself  reverted  to  the  social  group.  Long 
after  the  right  of  bequeathing  chattels  developed,  there  was 
no  such  privilege  connected  with  real  estate.  Wills  and  intestate 
succession  are  everywhere  the  outgrowth  of  the  family,  —  the 
immediate  kinship  which,  as  we  know,  was  the  product  of  eco- 
nomic forces.  To  insure  the  perpetuation  of  the  property 
beyond  the  life  of  the  testator  became  one  of  the  most  potent 
factors  in  the  desire  of  acquisition  and  in  the  economy  of  pro- 
duction. Where  the  economic  and  social  importance  of  the 
family  is  great,  we  even  find  that  the  right  of  bequest  becomes 
a  duty,  with  the  correlative  right  of  inheritance  on  the  part  of 
the  surviving  members  of  the  family.  Such,  for  instance,  is  the 
portion  legitime  or  legal  right  of  the  children  in  France  and  Ger- 
many, or  the  dower  right  of  the  widow  in  Anglo-Saxon  countries. 

With  the  weakening  of  the  family  sentiment  in  modern 
times  and  its  restriction  to  a  continually  smaller  group,  the 
movement  for  a  limitation  of  inheritance  has  begun  to  make 
some  headway.  The  great  development  of  modern  progressive 
inheritance  taxes  and  more  especially  of  collateral  inheritance 
taxes  is  an  illustration  of  this  tendency.  When  the  rate  of 
such  taxation  reaches  15%  as  in  the  United  States  a  few  years 
ago,  18%  as  in  England,  and  20%  or  even  25%  as  in  some  of 
the  states  of  Switzerland  and  Australasia,  we  are  on  the  high- 
road to  a  considerable  limitation  of  the  right  of  bequest.  There 
is  every  reason  to  believe,  however,  that  just  as  the  kernel  of 
the  intimate  family  will  continue  to  subsist,  the  movement  will 
be  arrested  at  that  point  where  it  might  imperil  the  tendency 
to  acquisition. 

On  the  other  hand,  the  right  of  unlimited  accumulation  of 
wealth  has  scarcely  been  affected.  Even  though  it  may  be 
conceded  that  the  heaping  up  of  enormous  fortunes  may  seri- 


138  Private  Property  [§58 

ously  strain  the  machinery  of  democratic  government,  there 
is  an  insuperable  difficulty  in  fixing  any  point  beyond  which 
the  further  accumulation  of  wealth  may  be  declared  economi- 
cally or  politically  dangerous.  We  refer  here  to  wealth  in 
general,  honestly  acquired.  Private  property  in  certain  things 
indeed  is  considered  wrong,  irrespective  of  amount;  dishonesty 
is  as  reprehensible  and  as  frequent  (or  as  infrequent)  in  a  small 
as  in  a  large  business.  Great  fortunes  in  general  can  be  hon- 
estly acquired  only  by  conferring  great  advantages  on  society; 
he  who  serves  the  community  best  will  reap  the  greatest  profits. 
The  successful  and  upright  business  man  retains  the  market 
only  so  long  as  he  undersells  his  competitors,  and  to  that  extent 
benefits  the  consumers.  To  check  profits  would  mean  to  check 
enterprise;  to  check  enterprise  would  mean  higher  prices  and 
greater  sacrifice.  The  limitation  of  wealth  as  such  is  imprac- 
ticable and  economically  perilous. 

No  one,  however,  would  gainsay  the  essential  reasonable- 
ness of  the  general  feeling  that  prodigious  inequalities  of  for- 
tune are  in  the  long  run  a  menace  to  the  stability  of  democratic 
virtues.  But  the  solution  of  the  problem  cannot  be  found  by 
opposing  private  property  as  such,  or  by  erecting  a  barrier  to 
the  accumulation  of  wealth.  It  is  futile  to  deny  or  to  minimize 
the  basic  importance  of  private  property  on  which  the  entire 
civilization  of  modern  times  is  built.  The  economic  ideal  may 
best  be  expressed  in  the  words  of  Aristotle  of  old,  —  that  prop- 
erty should  be  private,  but  its  use  common.  What  he  meant 
was  to  inculcate  the  idea  of  the  public  trusteeship  of  wealth, 
or  the  principle  of  the  social  responsibility  of  the  wealth-getter. 
Economic  progress  is  indeed  intimately  bound  up  with  the  in- 
stitution of  private  property,  and  yet  society  is  asserting  a  claim 
to  be  heard  in  its  control  and  disposition.  We  are  beginning  to 
realize  the  duties  as  well  as  the  rights  of  wealth.  This  moral 
obligation  is  based  on  the  sound  economic  conception  of  social 
utility  as  at  once  the  justification  and  the  limitation  of  private 
property. 


CHAPTER   X 
COMPETITION 

59.   References 

A.  T.  Hadley,  Freedom  and  Responsibility  (1903),  ch.  v  ;  R.  T.  Ely, 
Evolution  of  Industrial  Society  (1903),  part  2,  ch.  i;  J.  S.  Nicholson, 
Principles  of  Political  Economy  (1893),  bk.  ii,  ch.  v;  E.  Kelly,  Govern- 
ment, or  Hutnan  Evolution,  I  (1898);  P.  Kropotkin,  Mutual  Aid  a  Factor 
of  Evolution  (1902);  W.  W.  Willoughby,  Social  Justice  (1900),  ch.  ix; 
C.  H.  Cooley,  Personal  Competition  (Am.  Econ.  Assoc,  Economic  Studies, 
IV,  1899);  A.  R.  Wallace,  Studies,  Scientific  and  Social  (2  vols.,  1900), 
chs.  xiv — xvii,  xxiii,  xxviii;  A.  Marshall,  Sotne  Aspects  of  Competition 
Qour.  Stat.  Soc,  LIII,  1890);  Clark  and  Giddings,  The  Modern  Dis- 
tributive Process  (1888). 

60.   Nature  of  Competition 

Competition  is  in  a  certain  sense  the  law  of  all  life.  Biology 
has  made  us  familiar  with  the  animal  struggle  for  existence 
and  has  disclosed  the  process  of  natural  selection,  as  resulting 
in  the  survival  of  the  fittest.  The  chief  form  of  this  conflict  is 
between  the  living  being  and  the  forces  of  nature,  the  struggle 
of  the  individual  to  accommodate  himself  to  the  environment, 
and  the  evolution  under  favorable  conditions  of  those  who 
survive  by  learning  so  to  accommodate  themselves.  When 
nature  is  niggardly  and  her  resources  do  not  suflice  for  all,  the 
struggle  with  nature  is  reinforced  by  a  contest  between  the 
various  groups  or  units  to  secure  their  share.  It  is  here  that 
competition  emerges,  —  not  a  struggle  against  nature,  but  a 
conflict  of  one  unit  with  another  in  order  to  enjoy  the  bounty 
of  nature. 

It  is  a  striking  fact  that  the  earliest  form  of  competition 
is  a  group  competition  rather  than  an  individual  competition. 

139 


140  Competition  [§60 

Al  all  events,  without  going  back  to  the  beginnings  of  life,  it 
is  reasonably  certain  that  the  first  competition  found  among 
human  beings,  as  indeed  is  still  the  case  with  most  animals, 
is  the  competition  of  one  horde  or  pack  with  another  in  the 
endeavor  to  secure  the  means  of  subsistence.  Thus  from  the 
very  outset  the  principle  of  mutual  aid  emerges,  and  competi- 
tion between  the  groups  is  possible  only  because  of  co-opera- 
tion within  the  group.  These  early  forms  of  co-operation  are 
seen  in  the  American  frontier  life  when  the  neighbors  come 
in  to  the  "log-rolling,"  the  "raising"  of  the  building,  the  "husk- 
ing bee"  or  the  "sugaring  off"  of  the  maple  trees.  With  the 
development  and  differentiation  within  the  group,  the  prin- 
ciple of  natural  selection,  that  is,  of  competition,  makes  itself 
felt  as  between  the  members  of  the  group;  but  the  process  is 
slow  because  the  welfare  of  the  individual  is  deemed  to  be 
subordinate  to  that  of  the  whole.  As  the  groups  become  larger 
and  more  powerful,  we  notice  continually  higher  forms  of  mu- 
tual aid,  but  we  find  at  the  same  time  more  play  given  to  the 
activity,  or,  in  other  words,  to  the  competition,  of  the  individual. 
Finally,  in  historic  times  the  competition  between  nations  is 
decided  not  only  by  the  character  of  the  state,  as  the  most  de- 
veloped form  of  human  co-operation,  but  still  more  by  the 
results  of  the  competitive  struggle  within  the  nation  in  develop- 
ing those  qualities  of  body  and  mind  on  which  political  power 
ultimately  rests.  Competition  in  one  form  or  another  is  co- 
terminous with  life  itself. 

If  competition,  as  a  biological  conception,  is  thus  an  ex- 
planation, in  part  at  least,  of  progress,  it  becomes  of  even  more 
importance  when  applied  to  the  economic  domain.  The  sub- 
ject matter  of  economics  is  human  relations  to  wealth.  The 
difference  between  man  and  animals  is  not  that  man  econo- 
mizes wealth  (for  some  animals  do  the  same),  but  that  he  pro- 
duces wealth.  Competition  therefore  in  human  economics  is 
not  simply  a  contest  to  divide  an  existing  sum,  but  a  struggle 
to  share  in  an  increasing  stock.     The  first  requisite  of  secur- 


§  6i]  Forms  of  Competition  141 

ing  an  additional  share  is  to  produce  more.  In  this  struggle  to 
dispose  of  the  increased  product  to  the  whole  body  of  consumers, 
the  victory  will  lie  with  those  that  can  create  better  or  cheaper 
products.  The  surest  method  of  capturing  the  market  is  to 
undersell  one's  competitor.  Thus  competition,  as  a  business 
principle,  means  a  struggle  to  augment  wealth  through  a  lower- 
ing of  cost.  If  competition  in  biology  leads  only  indirectly 
to  progress,  competition  in  economics  is  the  very  secret  of 
progress.  Under  normal  conditions  competition  is  indeed  the 
hfe  of  trade.  The  individual  competitor  may  incidentally 
amass  a  fortune,  but  if  he  does  so  honestly  (and  dishonesty  is 
not  an  attribute  of  wealth,  but  of  individuals,  whether  rich  or 
poor),  it  can  only  be  by  conferring  upon  the  community  still 
greater  benefits.     He  conquers  who  does  best  for  society. 

Competition  in  economic  life,  therefore,  is  a  potent  factor 
in  the  growth  of  capital.  Working  hand  in  hand  with  the  prin- 
ciple of  private  property,  it  is  the  chief  incentive  to  progress. 
Through  it  we  secure  the  extension  of  the  margin  of  utilization, 
the  accumulation  of  the  surplus  available  for  human  wants. 
Competition,  moreover,  is  the  great  safeguard  of  society. 
It  is  the  protection  of  the  consumer  against  the  high  price 
which  accompanies  exorbitant  profits;  for  it  is  the  automatic 
force  which  reduces  the  gains  of  the  inefficient  and  makes 
profits  depend  on  low,  rather  than  on  high,  price.  It  evokes 
in  individuals  the  fundamental  characteristics  of  energy,  thrift 
and  power;  and  it  harmonizes  to  a  large  extent  the  interests  of 
the  individual  and  of  society,  by  making  the  success  of  one 
depend  primarily  on  what  he  can  accomplish  for  the  other. 

61.   Forms  of  Competition 

The  chief  forms  of  competition  are  five  in  number,  —  com- 
modity competition,  individual  competition,  market  competi- 
tion, class  competition  and  race  competition. 

(i)  By  commodit}'  competition  is  meant  the  competition 
due   to   the   existence   of   social   choices.     Every   individual   is 


142  Competition  [§  61 

continually  debating  with  himself  whether  to  purchase  one 
commodity  in  preference  to  another.  Where  he  is  on  the 
margin  of  doubt  or  of  indifference  the  slightest  alteration  in 
the  price  will  cause  him  to  substitute  something  else.  The 
principle  involved  is  hence  called  the  principle  of  substitution. 
The  vendor  must  constantly  be  on  the  watch  lest  any  increase 
of  price  cause  the  disappearance  of  his  sales.  We  substitute, 
however,  not  only  one  thing  for  another,  but  also  one  agency 
of  production  for  another:  in  the  crucible  of  economic  wants 
everything  is  finally  tested  by  its  capacity  to  afford  the  greatest 
satisfaction.  Not  only  will  the  consumer  choose  now  this  and 
now  that  commodity,  but  the  employer  will  increase  now  his 
labor  force,  now  his  stock  of  machinery,  so  as  to  secure  the 
best  results.  The  least  change  in  the  rate  of  wages  or  of  in- 
terest may  lead  him  to  substitute  the  one  for  the  other.  It 
is  only  by  replacing  the  less  efficient  by  the  more  efficient 
factor  that  the  producer  is  able  to  induce  the  consumer  to 
select  one  commodity  in  preference  to  another.  Competition 
of  factors  of  production  is  thus  really  an  adjunct  to  commod- 
ity competition.  Competition  through  substitution  is  hence 
important  in  that  it  fixes  a  maximum  limit  beyond  which  prices 
cannot  go.  Every  economic  factor,  like  every  economic  good, 
may  be  in  either  actual  or  potential  competition  with  another. 
The  existence  of  competition,  however,  implies  the  mobility  or 
free  interchange  of  the  factors  of  production  from  enterprise 
to  enterprise  and  from  commodity  to  commodity.  When  the 
fluidity  of  capital  and  the  transferability  of  labor  are  complete, 
the  competition  is  absolutely  free.  When  there  are  hindrances 
to  this  mobility,  we  speak  of  economic  friction.  The  substitu- 
tion of  one  commodity  for  another  may  be  hindered  by  legal, 
social  or  economic  causes.  Under  normal  conditions,  however, 
the  competition  is  real  and  effective. 

(2)  The  competition  .of  individuals  with  each  other  de- 
notes a  rivalry,  not  between  the  producers  of  different  com- 
modities or  between  the  different  factors  of  production,  but 


§  6i]  Forms  of  Competition  143 

between  the  producers  of  the  same  commodity  or  the  same 
factors  of  production.  Under  normal  conditions  competition 
here  puts  every  one  on  his  mettle,  and  success  is  a  measure 
of  the  contribution  to  the  social  fund.  The  more  a  laborer 
produces,  the  higher  his  wages  will  be;  the  larger  the  output 
of  a  particular  cotton  mill  and  the  lower  the  cost  at  which  it 
can  market  its  goods,  the  greater  will  be  the  benefit  to  the 
consumer  as  well  as  the  advantage  to  the  particular  producer. 
Competition  between  individuals  is  in  its  results  a  struggle  to 
enhance  efficiency,  to  increase  faculty,  to  multiply  productive 
power,  to  augment  ingenuity,  in  short,  to  develop  economic 
personality.  The  more  potent  the  personality,  the  greater  will 
be  the  command  over  the  powers  of  nature,  the  more  rapid  will 
be  the  development  of  the  wealth  which,  although  owned  by 
individuals,  yet  inevitably  ministers  to  the  welfare  of  society. 

(3)  By  market  competitioa^/e  mean,  not  the  competition 
of  individuals  in  the  market,  Tsut  the  competition  of  markets 
with  each  other.  Market  competition  includes,  indeed,  both 
commodity  competition  and  individual  competition  in  the 
sense  that  in  every  market  individuals  as  well  as  commodities 
compete  with  each  otl^^^But  it  is  something  over  and  above 
these.  Every  great  cit^K  continually  striving  to  develop  as 
a  centre  of  distribution  and  exchange,  in  the  well-founded  hope 
that  the  wealth  thus  amassed  will  lead  to  productive  efficiency 
in  other  lines.  New  York  is  competing  with  Baltimore  for  the 
grain  trade;  New  Orleans  with  Galveston  for  the  cotton  trade. 
Competition  between  markets  seeks  to  overcome  the  factor  of 
distance,  and  lies  at  the  root  of  the  problem  of  modern  methods 
of  transportation.  Here  again  market  competition  leads  to 
reduced  cost,  and  the  struggle  for  market  supremacy  can  be 
fought  to  a  successful  issue  only  through  more  effective  service. 

(4)  Clag^  cmjmtition  is  the  result  of  the  differentiation  of 
modern  socien^Bo  groups  of  producers.  We  have  not  only 
the  great  division  into  laborers  and  capitalists,  but  the  further 
separation  of  the  latter  into  the  owners  of  agricultural,  com- 


144  Competition  [§  6i 

mercial  and  industrial  capital  —  that  is,  landowners,  mer- 
chants and  factory  owners  —  and  the  still  further  subdivision 
of  each  class  into  minor  groups.  It  pleases  some  writers,  like 
the  socialists,  to  erect  this  principle  under  the  name  of  class 
conflict  into  the  fundamental  explanation  of  all  economic  change, 
and  to  regard  it  as  involving  not  only  the  expropriation  of 
the  victim,  but  the  ultimate  downfall  of  society  as  well.  In 
reality  class  competition,  while  as  inevitable  as  the  other  forms 
of  competition,  is  within  proper  bounds  just  as  beneficial. 
Under  a  system  of  free  competition  capital  will  flow  into  in- 
dustry in  preference  to  agriculture  only  when  industrial  pur- 
suits are  more  productive,  that  is,  when  the  community  as  a 
whole  sets  more  store  by  the  products  of  industry.  Whether 
the  moneyed  interest  or  the  landed  interest  is  more  prosperous 
depends  at  bottom  upon  their  success  in  making  converts 
among  the  consumers,  and  Ih^extent  of  conversion  depends 
on  what  they  can  offer  in  th^way  of  lower  prices  or  better 
products.  The  laborers  and  the  capitalists  again  represent 
competing  interests,  but  the  share  of  each  in  wages  and  profits 
depends  ultimately,  as  we  shall  see,  on  their  relative  contribu- 
tion to  the  common  product.  ^Ib 

(5)  Race  or  national  competition^^  its  economic  aspects  is 
the  final  form  of  the  modern  struggle.  The  most  marked 
characteristic  of  recent  progress  is  the  gradual  substitution  of 
peaceful  rivalry  of  commerce  for  the  sanguinary  clash  of  arms. 
The  modern  weapon  is  not  the  javelin  or  the  rifle,  but  the 
enterprise  of  the  domestic  producer  aided  by  the  exporter. 
Every  nation  that  has  reached  commercial  or  industrial  matu- 
rity endeavors  to  seek  in  the  foreign  market  a  profitable  outlet 
for  its  own  surplus  productions.  This  attempt  to  secure  a 
market  is  indeed  responsible  for  an  occasional  war.  In  the 
main,  however,  the  struggle  to-day  is  one  kj^heapness,  and 
in  the  end  it  is  not  the  large  army  or  nav>^^^the  most  effi- 
cient producer  that  permanent  I3'  retains  the  neutral  market. 
It  is  not  to  be  denied  that  both  a  large  army  and  a  large  navy 


§62]  Dangers  of  Competition  145 

may  be  needed  to  protect  the  commercial  or  other  national 
interests;  but  the  foundation  of  military  greatness  in  modern 
times  is  primarily  economic,  and  when  economic  efficiency 
has  disappeared,  military  strength  must  also  disintegrate. 
Great  nations  are  now  judged,  not  by  the  numbers  of  their 
battalions  or  ships,  but  by  the  volume  of  domestic  production 
and  foreign  trade.  Economic  power  represents  potential  mili- 
tary capacity.  Here,  again,  national  competition  is  salutary. 
The  fundamental  error  of  the  old  mercantilistic  doctrine  was 
the  belief  that  what  one  nation  gains  in  trade,  the  other  neces- 
sarily loses.  The  modern  doctrine  is  that  every  nation  is 
helped  by  the  prosperity  of  its  neighbor,  on  the  principle  that 
the  more  wealthy  the  customer  the  greater  will  be  his  pur- 
chases. Both  nations  may  gain,  although  one  may  gain  more 
than  the  other.  The  foreign  markets  can  be  retained  only  by 
underselling;  the  profits  of  one  country  can  be  secured  only 
by  conferring  these  advantages  on  the  consumers  of  the  others. 
National  competition,  like  personal  and  class  competition,  can 
benefit  the  individual  country  only  by  benefiting  the  group; 
it  enriches  one  nation,  but  incidentally  develops  the  others. 

*    t 

62.   Dangers  of  Competitiou 

In  describing  the  essential  beneficence  of  competition  in  its 
various  forms,  we  must  not  blind  ourselves  to  its  shortcomings. 
Some  of  these  evils  are  inevitable.  Where  there  are  a  contest 
and  a  victor,  there  must  be  a  victim.  There  can  be  no  strug-. 
gle  without  some  pang  to  the  conquered.  Suffering  is  an 
accompaniment  of  progress,  just  as  sacrifice,  at  least  in  the 
sense  of  effort,  is  a  prerequisite  to  enjoyment.  In  the  animal 
world,  where  the  sway  of  competition  is  relentless,  the  evil  is 
pronounced.  Progress  there  is  purchased  by  the  death  of  the 
victim.  The  fightJs  one  of  bestial  instincts  and  brute  powers, 
—  the  victory,  n^cvcr  beneficial  to  the  race,  is  secured  at  a 
tremendous  sacrifice.  Human  competition,  on  the  other  hand, 
has  in  its  economic  form,  as  we  have  seen,  something  in  com- 


146  Competition  [§62 

mon  with,  but  also  much  in  contradistinction  to,  brute  compe- 
tition. Economic  competition  may  indeed  involve  the  economic 
death  of  the  unsuccessful  competitor.  The  producer  who  is 
undersold  by  his  rival  will  ultimately  be  compelled  to  abandon 
the  field.  His  adversary's  success,  which  means  progress  for 
the  consumer,  spells  his  ruin. 

There  are,  however,  two  points  in  which  brute  and  human 
competition  are  unlike.  In  the  first  place  the  economic  de- 
feat may  be  only  temporary.  The  producer  who  has  failed 
in  one  business,  often  succeeds  in  another  for  which  he  is  better 
fitted.  His  original  failure  may  be  the  means  of  redoubled 
efforts  and  final  victory  elsewhere.  His  downfall  is  not  nec- 
essarily his  end,  but  may  be  his  real  beginning.  In  the  second 
place,  in  economic  competition  there  may  be  no  death  at  all, 
but  only  a  relative  defeat  in  the  sense  that  the  progress  of  both 
competitors  is  unequal.  Laborers  compete  with  capitalists, 
one  country  vies  with  another;  both  may  continually  gain, 
even  though  in  dififerent  proportions.  In  brute  competition 
the  struggle  is  only  for  consumption;  in  human  competition  the 
contest  takes  the  form  of  production.  In  the  end,  indeed,  the 
goal  of  both  is  enjoyment;  but  thQ  means  of  reaching  the  end 
are  different.  This  difference  renders  possible  a  participation 
by  both  contestants  in  the  gains  of  production  that  are  caused 
by  economic  competition. 

Even  with  these  qualifications,  however,  competition  is  often 
a  painful  process,  none  the  less  painful  because  the  struggle 
has  been  transferred  from  the  arena  of  bodily  strength  to  that 
of  mental  capacity.  The  competition,  moreover,  may  some- 
times become  so  fierce  that  for  a  time  at  least  it  exhausts  the 
powers  of  both  competitors.  This  is  the  "cut-throat  competi- 
tion" of  which  we  have  heard  so  much  in  recent  years,  when, 
in  the  effort  to  capture  the  market,  prices  are  reduced  below  the 
cost  of  production.  The  temporary  advantages  to  the  con- 
sumer are  dearly  purchased  through  the  ruin  of  all  the  pro- 
ducers.    Here   we   see   competition   at   its   worst,    because   all 


§63]  Limits  of  Competition  147 

competitors  are  pulled  down  to  the  level  of  the  most  unscrupu- 
lous. In  the  same  way  there  may  be  excessive  competition 
between  laborers,  as  when  the  necessities  of  the  laborers  com- 
pel them  to  accept  the  standard  of  the  worst-paid  or  hardest- 
worked  laborer.  In  the  one  case  as  in  the  other  this  unfair 
competition  endangers  the  perpetuity  of  a  successful  business 
or  of  a  prosperous  working  class.  The  question  then  arises  as 
to  whether  it  is  not  possible  to  conserve  the  chief  advantages 
of  competition  and  at  the  same  time  to  lop  off  some  of  its  ex- 
crescences; to  maintain  the  social  benefits  while  minimizing 
the  individual  costs.  In  other  words  the  question  is:  what 
are  the  real  limits  of  competition? 

63.   Limits  of  Competition 

The  problem  may  be  approached  from  three  points  of  view, 
■ —  the  level  of  competition,  the  maintenance  of  equality  and 
the  existence  of  quasi-public  enterprises. 

(i)  The  fundamental  distinction  between  brute  and  human 
competition,  underlying  all  the  others  that  have  been  men- 
tioned, is  the  point  with  which  we  have  become  familiar,  namely, 
that  while  animals  are  governed  by  their  environment,  man, 
to  a  certain  extent  at  least,  can  alter  his  environment.  This 
is  true  not  alone  of  the  physical,  but  to  a  much  greater  extent 
of  the  socio-economic  environment.  The  function  of  society 
is  to  raise  the  general  plane  of  competition.  Even  in  that 
extreme  form  of  competition  known  as  war,  international  agree- 
ments have  succeeded  in  preventing  a  certain  amount  at  least 
of  wanton  injury  and  needless  suffering,  without  in  any  degree 
impairing  the  real  intensity  of  the  conflict.  It  is  no  longer 
true  that  "all  is  fair  in  love  and  war."  In  economic  life,  simi- 
larly, we  often  hear  of  unfair  or  cut-throat  competition,  with 
the  implication  that  unworthy  and  reprehensible  measures 
are  being  employed.  With  the  development  of  business  life 
there  has  been  a  continual  movement  away  from  the  early 
brute-like  struggle.     The  community  to-day  is  frequently  con- 


148  Competition  [§63 

trasting  "fair"  with  "unfair"  competilion.  Not  only  does  the 
idea  of  what  constitutes  a  "fair"  competition  change  from  age 
to  age,  but  it  differs  at  the  same  age  in  different  occupations. 
The  practices  of  our  railways  are  very  different  from  what  they 
were  a  generation  ago.  The  professional  ethics  governing  the 
competitive  charges  of  a  lawyer  or  a  physician  scarcely  resemble 
those  of  a  tradesman.  The  code  of  business  morals  is  not 
the  same  in  Wall  Street  as  in  Worth  Street;  the  competition 
of  farmers  is  often  conducted  on  a  different  level  from  that 
of  factory  owners.  Each  group  has  its  own  standard,  and  the 
average  man  is  satisfied  if  he  conforms  to  it.  The  object  of 
all  progress  is  to  elevate  this  standard  and  to  give  a  continu- 
ally broader  interpretation  of  what  is  economically  "fair." 
Conformity  to  the  standard,  however,  involves  some  interfer- 
ence with  individual  liberty.  Through  the  force  of  public 
opinion,  reflected  in  business  usage  or  legislative  enactment, 
competition  is  being  made  to  assume  a  higher  form.  Dishon- 
esty is  frowned  down,  factory  laws  are  enacted,  the  scab  and 
strike-breaker  are  reprobated,  unscrupulous  financiering  is  pun- 
ished.    Competition  is  not  destroyed,  but  its  level  is  raised. 

(2)  The  second  consideration  is  that  of  equality.  Perfect 
equality  indeed  does  not  exist,  since  variety  is  the  law  of  life. 
Competition  does  its  work,  in  the  economic  as  in  every  other 
field,  precisely  by  giving  the  victory  to  the  better  equipped. 
When  the  disparity  between  the  competitors,  however,  is  enor- 
mous, the  community  often  fails  to  reap  the  essential  benefits  of 
competition.  If  one  individual,  can  produce  a  commodity  for 
ten  cents,  and  if  it  costs  his  sole  competitor  fifty  cents,  a  sell- 
ing price  of  forty-five  cents  will  give  him  the  command  of  the 
market;  whereas  with  a  more  capable  group  of  competitors  he 
might  be  compelled  to  reduce  the  price  to  fifteen  cents.  The 
greater  the  equality  between  the  competitors,  the  more  sub- 
stantial are  the  gains  to  the  consumers.  If  the  producer  can 
in  some  way  be  rendered  more  efficient,  so  that  the  disparity 
will  diminish,   to  that  extent  the  community  will  gain.     This 


§63]  Limits  of  Competition  149 

is  also,  as  we  shall  see,  the  principal  argument  in  favor  of  the 
regulation  of  international  competition  through  a  protective 
tariff.  In  the  same  way  the  demand  for  a  minimum  wage 
and  some  of  the  other  legitimate  practices  of  trade-unions 
are  intended  to  bring  the  weakest  nearer  the  standard  of  the 
strongest.  In  its  best  aspects  it  is  a  levelling  up,  rather  than 
a  levelling  down. 

The  point  to  be  emphasized  is  that  the  strengthening  of  a 
weak  competitor  may  redound  to  the  advantage  not  only  of 
the  competitor  himself,  but  to  that  of  the  whole  group,  and 
ultimately  to  that  of  the  community.  Competition  remains, 
but  is  rendered  less  unequal.  Here,  as  elsewhere,  indeed, 
there  is  always  the  danger  that  the  community  may  suffer 
more  from  the  restriction  on  the  strong  than  it  gains  from  the 
advantage  to  the  weak.  This,  however,  is  the  danger  of  all 
democracy,  which  must  be  guarded  against  in  other  ways. 

(3)  The  third  point  is  the  existence  of  quasi-public  enter- 
prises. Shortly  after  the  so-called  "merger  decision"  of  the 
Supreme  Court  in  1904,  in  which  the  Northern  Securities 
Company  was  declared  illegal,  a  noted  lawyer  stated  publicly 
by  way  of  criticism  that  no  one  any  longer  believed  in  the  old 
adage  that  "competition  is  the  life  of  trade."*  This  remark 
rested  upon  a  confusion  of  thought.  Competition  of  a  certain 
kind  between  railways  is  certainly  not  the  life  of  trade.  But 
why?  Railways,  like  some  other  media  of  transportation  and 
transmission  of  commodities,  intelligence  and  power,  differ 
from  ordinary  commercial  enterprises  in  that  they  are  quasi- 
public  in  nature.  They  carry  on  enterprises  in  which  the 
public  interest  is  so  commanding  that  it  must  not  be  subordi- 
nated to  private  profit.  In  ordinary  private  business  buyers 
and  sellers  mak^  their  individual  bargains  with  each  other; 
and  while,  as  we  shall  see,  open  competitive  prices  tend  to 
uniformity,  there  is  nothing  to  prevent  the  more  powerful  or 
the  more  favored  purchaser  from  secretly  securing  a  lower 
price.     Much  of  the  profit  of  the  business  man,  indeed,  con- 


150  Competition  [§64 

sists  in  this  skill  in  purchasing  on  favorable  Icrms;  the  very 
essence  of  usual  business  practice  is  this  system  of  different 
prices  to  different  customers.  It  is  precisely  the  attempt  on 
the  part  of  railways  to  pursue  this  same  policy  which  has  cre- 
ated the  "railway  problem"  in  the  United  States.  It  is  now 
recognized  that  the  railway  has  no  more  right  to  make  per- 
sonal discriminations  between  its  customers  than  has  the 
government  post-office.  The  wealthy  merchant  cannot  buy 
postage  stamps  cheaper  than  his  smallest  competitor;  he  ought 
not  to  be  able  to  secure  more  favorable  freight  facilities.  Com- 
petition in  ordinary  business  means  the  different  treatment 
of  individuals,  and  is  beneficial;  competition  in  railway  rates 
means  discrimination  between  shippers,  and  is  reprehensible. 
Competition  in  ordinary  prices  is  the  soul  of  trade;  competi- 
tion in  railway  rates  is  the  death  of  legitimate  trade.  The 
only  kind  of  competition  that  is  desirable  in  quasi-public  enter- 
prises is  the  competition  of  service  and  of  facilities. 

Competition  therefore  is  a  force  that  must  not  be  abused. 
It  is  applicable  only  in  a  slight  degree  to  certain  kinds  of  busi- 
ness, it  works  most  beneficially  in  the  presence  of  comparative 
equality,  and  its  level  of  action  stands  in  need  of  a  continual 
elevation.  Within  these  limits,  and  with  these  conditions,  it 
is  a  vital  and  salutary  force. 

64.   Substitutes  for  Competition 

As  opposed  to  competition  there  are  three  possible  regula- 
tors of  economic  phenomena,  —  custom,  co-operation  and 
monopoly. 

(i)  Custom  at  one  time  played  a  far  greater  role  than  it 
does  to-day.  In  the  more  immobile  communities  of  the  Orient, 
as  well  as  in  the  early  middle  ages  of  Europe,  jociety  was  largely 
governed  by  status  rather  than  by  contract.  People  were 
born  into  certain  conditions  and  occupations,  and  to  emerge 
from  these  was  difficult  or  impossible.  In  the  rigidity  of  the 
Indian  caste  system  we  see  the  highest  development  of  custom. 


§64]  Substitutes  for  Competition  151 

Prices  also  were  largely  customary  prices;  ihe  entire  mediaeval 
conception  of  justuni  prctlum  centred  in  the  attempt  to  enforce 
the  customary  price.  Capital  was  to  a  great  extent  fixed  in 
land,  and  thus  immobile;  labor  was  not  permitted  to  shift  at 
will  from  place  to  place  or  from  trade  to  trade.  Nevertheless, 
even  in  the  stage  of  the  customary  economy  competition  was 
not  entirely  absent.  At  bottom  values  were  far  more  depend- 
ent upon  the  working  out  of  subtle  and  masked  competitive 
forces  than  is  usually  conceded.  To-day  custom  still  plays  a 
perceptible  although  fast-dwindling  role  in  the  determination  of 
some  economic  phenomena.  Even  in  the  backward  and  primi- 
tive sections  of  our  country  the  storm  and  stress  of  modern  com- 
petitive life  are  making  rapid  inroads.  The  economic  theory  of 
industrial  society  now  rests  on  competition,  not  on  custom. 

(2)  Co-operation  is  in  sc/me  aspects  the  opposite,  but  in 
others  the  corollary,  of  competition.  We  have  seen  that  from 
the  very  beginning  there  was  mutual  aid  within  the  group,  in 
order  the  better  to  carry  on  the  competition  between  the  groups. 
There  is  even  to-day  no  competition  within  the  family,  although 
a  very  lively  competition  between  families.  So  in  the  same 
way  the  stockholders  of  a  corporation  co-operate,  in  order  the 
more  effectively  to  compete  with  another  corporation.  There 
are  in  fact  all  kinds  of  associations,  voluntary  and  compulsory, 
including  church  and  state,  which  fill  out  modern  social  life 
and  which  have  more  or  less  economic  influence,  working  in 
perfect  harmony  with  the  struggles  of  the  market.  This  kind 
of  co-operation  is  compatible  with  competition. 

Co-operation  in  its  technical  sense,  however,  means  the 
abandonment  of  competition  in  distribution  and  in  production. 
In  distributive  co-operation,  the  customers  who  arc  members 
of  the  co-operative  societies  select  one  of  themselves  as  man- 
ager of  the  store  and  share  any  resulting  profits.  As  they  are 
expected  to  make  no  purchases  elsewhere,  there  is  no  compe- 
tition. Such  co-operative  stores  are  found  principally  in  Great 
Britain.     They  have  never  flourished  in  America  because  they 


152  '     Competition  [§64 

have' been  unable  lo  supply  the  commodilies  as  cheaply  as  the 
great  department  stores.  In  productive  co-operation  the  ob- 
ject is  to  eliminate  the  capitalist  and  to  remove  competition 
between  the  workmen.  The  laborers  elect  one  or  more  of  their 
number  to  control  the  enterprise,  and  divide  among  themselves 
the  gains.  Co-operative  production  has  achieved  some  notable 
triumphs  in  both  Europe  and  America,  but  as  we  shall  see  (§  183), 
its  scope  is  exceedingly  restricted,  and  there  are  great  obstacles 
to  its  general  adoption  as  a  substitute  for  competition. 

(3)  While  co-operation  implies  an  abandonment  of  compe- 
tition either  between  consumers  or  between  laborers,  there  is 
a  third  form  of  co-operation  which  implies  abandonment  of  com- 
petition among  capitalists  or  managers  of  business.  This  is 
usually  called  combination.  If  the  combination  is  incomplete, 
however,  it  is  still  subject  to  the  force  of  competition;  if  it  is 
complete,  it  has  become  a  monopoly.  Monopoly  therefore  is 
the  ultimate  outcome  of  the  cessation  of  business  competition. 

Monopoly  has  existed  in  many  forms,  and  there  are  accord- 
ingly several  categories  of  classification.  Monopolies  are  either 
private  or  public,  and  public  monopolies  are  either  fiscal  or 
social.  Fiscal  monopolies  are  enterprises  conducted  by  gov- 
ernment for  fiscal  reasons,  like  the  salt  or  tobacco  monopoly 
abroad.  Social  monopolies  are  enterprises  conducted  by  gov- 
ernment primarily  for  social  reasons,  like  the  federal  post- 
office,  or  the  South  Carolina  dispensary  system.  Private 
monopolies,  on  the  other  hand,  are  of  three  classes,  —  per- 
sonal, labor  and  capital  monopolies.  Personal  monopolies  rest 
upon  natural  talent;  a  great  actor  or  musician  is  in  a  class  by 
himself.  Labor  monopolies  rest  upon  labor  organization  and 
afifect  chiefly  the  employer,  although  indirectly  the  public. 
Capital  monopolies  are  the  ones  with  which  the  consumer  in 
general  usually  comes  into  contact. 

Capital  monopolies,  finally,  are  of  four  kinds,  —  legal,  natural, 
franchise  and  ordinary  business  monopolies,  (i)  Legal  mo- 
nopolies were  at  one  time  common,  through  grant  of  the  mon- 
arch to  favorites.     They  are  to-day  found  only  in  the  restricted 


§64]  Substitutes  for  Competition  153 

form  of  patents  and  copyrights.  (2)  Natural  monopolies  are 
those  which  depend  on  natural  location,  as  in  the  case  of  certain 
specially  favored  lands,  mines  or  waters.  (3)  Franchise  monop- 
olies take  the  form  of  quasi-public  enterprises  like  railways, 
telegraph  and  telephone  companies,  gas,  water  and  electric 
light  companies,  whose  profitable  operation  depends  on  the  grant 
of  a  franchise  to  use  the  public  highways,  on,  above  or  below 
the  surface.  Strictly  speaking,  they  might  be  classed  as  a  sub- 
division of  natural  monopolies.  Here  experience  shows  that 
competition  is  in  the  long  run  impossible  and  undesirable,  either 
because,  as  in  the  case  of  railways,  it  leads  to  discrimination, 
or  because,  as  in  the  case  of  the  so-called  municipal  monopolies, 
it  leads  to  an  unendurable  interference  with  the  streets  or  an 
unnecessary  duplication  of  plant.  (4)  Ordinary  business  mo- 
nopolies, finally,  cover  the  great  mass  of  modern  enterprises 
known  as  trusts,  and  as  to  the  essential  monopolistic  character  of 
which  there  is  room  for  doubt,  as  will  be  explained  later  (§  148). 

It  is  clear  that  private  monopoly  is  a  satisfactory  regulator 
of  price  only  in  personal  monopolies,  where  the  consumer  is 
glad  to  recognize  and  to  foster  exceptional  talent,  as  well  as  in 
patents  and  copyrights  where  society  is  willing  for  a  time  to 
forego  the  advantage  of  competition  for  the  sake  of  stimulat- 
ing invention,  and  thus  ultimately  reaping  the  benefits.  In 
all  other  cases  of  private  monopoly,  the  consumer  is  to  a  cer- 
tain extent  at  least  left  defenceless.  Where  there  is  no  reliance 
upon  competition,  recourse  must  be  had  to  some  form  of  legis- 
lative control.  Unregulated  monopoly  can  therefore  only  in 
most  exceptional  cases  be  a  substitute  for  competition. 

Competition  hence  remains  the  permanent  and  controlling 
force  of  economic  society.  It  is  not  all  pervasive  or  uniformly 
advantageous.  But  in  its  fundamental  aspect  it  lies  at  the  root 
of  progress,  and  when  stripped  of  its  excrescences  and  applied 
under  proper  limitations  it  is  as  beneficent  as  it  is  widespread. 
In  the  complex  society  of  the  present  day,  however,  the  limi- 
tations on  the  principle  often  assume  almost  as  much  impor- 
tance as  the  principle  itself. 


CHAPTER   XI 
FREEDOM 

65.  References 

H.  J.  Nieboer,  Slavery  as  an  Industrial  System,  2d  ed.,  (1910);  J.  K. 
Ingram,  History  of  Slavery  and  Serfdom  (1895);  J-  E.  Cairnes,  The  Slave 
Power  (1862);  T.  H.  Green,  Liberal  Legislation  and  Freedom  of  Contract  in 
Works  (Nettleship's  ed.,  1888),  III;  J.  F.  Stephens,  Liberty,  Equality 
and  Fraternity  (1873);  H.  C.  Adams,  Economics  and  Jurisprudence  (Am. 
Econ.  Assoc,  Economic  Studies,  II,  1897);  R.  T.  Ely,  Property  and  Con- 
tract (1914),  pt.  ii,  ch.  viii,  ix;  A.  T.  Hadle}',  Freedom  (1903),  chs.  iii,  iv, 
vi;  E.  Kelly,  Government  (1901),  II,  bk.  i,  ch.  v;  J.  S.  Nicholson,  Principles, 
bk.  v.,  chs.  ii,  iii,  and  Strikes  and  Social  Problems  (1896),  chs.  iv,  vii;  J.  S. 
Mill,  Principles  (1880),  bk.  v,  ch.  x;  S.  and  B.  Webb,  Lndustrial  Democ- 
racy (1904),  part  3,  ch.  iv,  and  Problems  of  Modern  Industry  (1907),  ch. 
x;  D.  G.  Ritchie,  The  Principles  of  State  Interference  (1896);  G.  G.  Groat, 
Attitude  of  American  Courts  in  Labor  Cases  (1911),  ch.  xi;  Commons  and 
Andrews,  Principles  of  Labor  Legislation  (1916). 

Immigration:  J.  R.  Commons,  Immigration  and  its  Economic  Effects 
(Indust.  Commiss.  Report,  XV,  1902);  J.  W.  Jenks  and  W.  J.  Laucks, 
The  Immigration  Problem  {igif);  Report  of  the  Immigration  Commission 
(42  vols.,  1910-1912);  H.  J.  Fairchild,  Greek  Immigration  to  the  U.  S. 
(1911)  and  Immigration  (1913);  P.  R.  Hall,  Immigration  (1912);  I.  A. 
Hourwich,  Immigration  and  Labor  (191 2);  Mary  R.  Coolidge,  Chinese 
Immigration  (1913);  F.  J.  Warne,  The  Immigrant  Invasion  (1913). 

66.   Origin  and  Growth  of  Slavery 

Industrial  liberty,  like  private  property,  is  the  result  of  a  slow 
evolution.  The  ordinary  picture  of  the  freedom  of  the  un- 
tutored savage  is  as  fanciful  as  the  rest  of  the  fairy  tales  of  our 
youth.  Primitive  man  lacked  freedom  in  three  ways:  he  was 
in  abject  dread  of  nature,  of  his  stronger  comrades,  and  of  the 
social  group.  In  his  ignorance  of  natural  phenomena  he  was 
a  prey  to  all  kinds  of  fear  and  superstition  and  an  easy  victim 
of  the  sorcerer  or  medicine  man.     Living  in  a  society  based  on 

154 


§  66]  Growth  of  Slavery  1 5  5 

brute  strength,  he  was  at  the  mercy  of  the  more  stalwart  savage. 
Dependent,  as  we  have  seen,  on  the  horde  or  clan  for  existence, 
he  was  hemmed  in  by  social  customs  that  could  not  be  in- 
fringed and  by  group  prohibitions  which  it  would  be  folly  to 
evade.  Civilization,  and  not  primitive  nature,  is  the  creator  of 
liberty.  Knowledge  has  emancipated  man  from  superstition, 
law  and  order  have  protected  him  from  the  oppressor,  social 
progress  has  evolved  in  every  phase  of  life  a  sphere  of  liberty, 
ever  more  secure  from  the  encroachments  of  absolutism.  Eco- 
nomic liberty  like  political  liberty,  freedom  of  thought  like 
freedom  of  speech,  are  the  product  of  the  most  advanced  stages 
of  society. 

The  freedom  which  is  of  special  concern  to  the  economist  is 
of  two  kinds:  bodily  freedom  as  the  basis  of  all  labor,  and 
freedom  of  economic  action  apart  from  control  of  one's  own 
labor.  The  first  involves  personal  liberty  in  the  narrower  sense 
and  leads  to  a  study  of  slavery.  The  second  comprises  a  num- 
ber of  phenomena  to  be  discussed  in  §  69.  We  take  up  first 
the  subject  of  slavery. 

The  origin  of  slavery  has  until  recently  been  much  mis- 
understood. It  is  commonly  stated  that  there  are  four  causes 
of  slavery:  conquest,  debt,  crime  and  birth.  Slaves,  we  are 
told,  were  recruited  from  the  victims  of  war;  from  the  ranks 
of  those  that  voluntarily  sold  themselves  or  were  unable  to  dis- 
charge their  debts;  from  the  criminals  who  earned  a  punish- 
ment only  short  of  death;  and  from  the  offspring  of  existing 
bondmen.  This  statement  is  accurate  enough,  but  it  sheds  no 
light  on  the  real  problem  of  the  origin,  the  spread  and  the 
decline  of  slavery. 

Slavery  is  obviously  an  institution  designed  to  secure  the 
services  of  others  by  force.  It  presupposes  the  need  of  labor 
on  a  moderately  large  scale.  In  the  earliest  stages  of  society 
well-nigh  the  only  work  done  by  man  consists  of  hunting  and 
fishing,  each  in  itself  to  a  great  extent  a  pleasurable  activity. 
Every  member  of  the  community  concerns  himself  with  such 


156  Freedom  [§  66 

work,  and  there  is  neither  need  nor  room  for  compulsory  labor. 
It  is  only  when  private  property  develops  that  we  find  the 
beginnings  of  slavery.  In  exceptional  cases  we  can  trace  pri- 
vate property  and  intertribal  barter  among  fishing  groups,  as 
in  some  of  the  Indian  tribes  on  the  North  Pacific  coast.  Here 
the  slave  is  utilized  to  a  certain  extent  in  work  connected  with 
fishing  and  in  domestic  labor.  In  general,  it  may  be  said  that 
slavery  can  exist  in  the  primitive  economic  stage  only  when 
subsistence  is  easy  to  procure  without  the  aid  of  capital.  When 
this  condition  is  lacking,  as  among  the  Australians  as  well 
as  among  the  great  mass  (although  not  all)  of  the  American 
Indians  and  the  Eskimos,  slavery  is  unknown. 

As  we  have  seen,  however,  private  property  acquires  social 
importance  only  with  the  pastoral  stage.  The  slave  can  now 
be  employed  as  the  cowherd,  the  swineherd,  the  shepherd. 
The  patriarchal  family  develops,  and  the  slave  becomes  an  in- 
tegral part  of  the  family  group.  Slavery,  however,  is  still  rela- 
tively insignificant.  Even  large  flocks  and  herds  can  be  tended 
by  a  few  herdsmen,  and  the  existence  of  a  great  mass  of  poverty- 
stricken  freemen  renders  recourse  to  slaves  unnecessary.  The 
accumulation  of  large  numbers  of  domestic  slaves,  moreover, 
is  prevented  by  the  exigencies  of  a  roving  existence. 

When  we  come  to  the  agricultural  stage,  the  conditions 
change.  Cultivation  of  the  soil  is  arduous,  and  yet  with  an 
adequate  force  of  laborers  it  is  profitable.  On  a  given  plot  of 
land  every  additional  laborer  means  up  to  a  certain  point  an 
increased  yield;  the  existence  of  settled  habitations  renders 
possible  the  employment  of  domestic  servants  in  various  capaci- 
ties. The  more  slaves,  the  more  wealth  and  the  more  ease  for 
the  slave  owner. 

In  the  early  stage  of  the  agricultural  period  slavery  is  still 
relatively  inconspicuous.  After  the  immediate  needs  of  the 
master  and  his  family  have  been  met  there  is  little  use  for 
additional  laborers.  It  is  only  with  the  growth  of  barter  and 
the  increasing  possibility  of  surplus  products  that  it  becomes 


§  66]  Growth  of  Slavery  157 

profitable  to  augment  l)olh  one's  land  and  one's  slaves.  In 
other  words,  a  market  for  agricultural  production  must  develop, 
and  the  landed  estates  must  be  managed  as  business  enter- 
prises. Slavery  becomes  highly  lucrative,  and  on  the  great 
estates  there  is  now  such  a  diversified  activity  that  large  num- 
bers of  slaves  are  employed  not  onJy  as  domestics  but  in  all 
kinds  of  industrial  work.  Thus  in  Rome  the  development  of 
slaverj'  on  an  extended  scale  did  not  take  place  until  the  later 
centuries  of  the  republic,  when  slavery  on  the  latifundia  became 
the  dominant  form  of  great  business  enterprise.  In  the  same 
way  slavery  became  an  important  factor  in  America  only  when 
the  cultivation  of  tobacco  and  later  of  cotton  on  a  considerable 
scale  for  the  foreign  market  made  the  labor  of  slave  gangs 
profitable. 

It  will  be  observed,  however,  that  in  addition  to  the  exist- 
ence of  a  market  one  other  factor  is  necessary  to  the  spread  of 
slavery.  This  is  a  supply  of  free  land.  It  is  only  when  there 
are  large  tracts  of  virgin  and  unoccupied  soU  that  slavery  be- 
comes at  once  lucrative  and,  from  the  point  of  view  of  the 
landowner,  necessary.  It  is  obvious  that  if  any  one  can  occupy 
and  till  on  his  own  account  a  plot  of  land  he  will  not  volun- 
tarily work  for  others,  except  for  a  remuneration  so  large  that 
it  will  exceed  what  he  himself  can  raise  from  the  soil.  The 
landowner  who  cannot  secure  voluntary  assistance  except  on 
what  he  regards  as  ruinous  terms  resorts  to  forced  labor.  As 
long  as  there  is  a  boundless  expanse  of  good  land  available, 
slave  labor,  which  implies  a  superficial  cultivation,  is  still  eco- 
nomical. It  pays  better  to  bring  fresh  land  under  the  plough 
than  to  put  more  effort  into  old  land;  it  is  more  profitable  to 
increase  acreage  than  to  redouble  effort.  Even  when  the  land 
becomes  poorer  through  an  exhaustive  culture,  slavery  is  still 
profitable  in  the  older  sections,  not  so  much  for  the  raising  of 
produce  as  for  the  raising  of  slaves  to  be  sold  to  the  newer  and 
more  distant  lands.  To  the  landowner  it  is  immaterial  whether 
he  secures  his  wealth  from  the  produce  of  land  or  of  slaves:    as 


158  Freedom  [§67 

long  as  the  supply  of  fresh  land  maintains  the  value  of  slaves, 
their  increasing  numbers  will  count erVjalance  the  decreasing 
fertility  of  his  land.  Finally,  when  slavery  has  become  the 
dominant  factor  in  production,  it  is  profitably  employed  not 
only  in  agriculture,  but  also  in  industry. 

Thus  in  classic  Greece  slavery  developed  with  the  growth  of 
intermunicipal  markets,  and  grew  strong  with  the  expansion  of 
the  colonies  on  all  sides  of  the  Mediterranean.  The  great 
city-states  became  not  only  the  chief  marts  but  also  the  chief 
breeders  of  slaves,  and  slavery  finally  dominated  industry  as 
well.  With  the  advent  of  Roman  sovereignty  slavery  received 
a  new  lease  of  life,  and  became  lucrative  not  only  on  the  Italian 
mainland  but. in  the  great  stretches  of  subjugated  states.  As 
long  as  the  career  of  conquest  and  fresh  accessions  of  territory 
continued,  slavery  flourished.  In  the  same  way  the  European 
immigrants  into  the  new  world,  whose  ancestors  had  just  seen 
the  last  vestiges  of  forced  labor  disappear  at  home,  no  sooner 
reached  American  soil  than  they  introduced  in  all  its  rigor  the 
ancient  system  of  slavery.  If  the  system  dominated  only 
agriculture  and  not  industry,  it  is  to  be  ascribed  to  the  fact 
that  a  controlling  industrial  civilization  had,  for  reasons  to  be 
noted  in  a  moment,  evolved  from  the  stage  of  slavery  to  that 
of  freedom,  first  in  Europe  as  against  the  colonies  in  general, 
and  then  in  the  North  as  against  the  South.  It  was  cheaper 
for  the  South  to  buy  its  industrial  products  in  the  free  North 
or  in  Europe  than  to  make  them  herself. 

67.  Decay  and  Disappearance  of  Slavery 

To  the  same  cause,  the  conditions  of  supply  of  fresh  land, 
must  we  ascribe  the  decay  and  the  final  disappearance  of 
slavery.  When  the  supply  of  new  land  diminishes,  the  eco- 
nomic disadvantages  of  slavery  make  themselves  apparent. 
As  Cairnes  pointed  out,  there  are  three  defects  in  slave  labor: 
it  is  given  reluctantly,  it  is  unskilful,  it  is  wanting  in  versatility. 
As  long  as  there  is  an  ample  supply  of  exuberantly  fertile  soU, 


§  67]  Decay  of  Slavery  159 

superficial  cultivation  suiSces.  But  with  every  decade's  culti- 
vation of  the  same  plot  the  productivity  suffers  and  the  need 
of  more  unremitting  labor  appears.  The  landowner  now  finds 
it  to  his  interest  to  mitigate  the  rigors  of  slavery  and  by  per- 
mitting the  cultivator  to  do  some  work  on  his  own  account  to 
induce  him  to  labor  somewhat  more  strenuously  for  his  master. 
The  slave  in  Rome  gradually  turns  into  the  coloniis,  just  as 
several  centuries  later  the  Anglo-Saxon  thegn  is  replaced  by 
the  villein,  —  the  slave  by  the  serf.  Serfdom  differs  from 
slavery  chiefly  in  that  the  individual  acquires  certain  personal 
rights  and  is  attached  to  the  soil.  He  goes  with  the  land,  but 
cannot  be  divorced  from  it.  The  serf  is  still  bound  to  work  a 
certain  part  of  his  time  for  the  landlord.  With  the  final  ex- 
haustion of  free  land,  however,  the  landlord  finds  that  he  can 
derive  more  profit  by  freeing  the  serf  completely  and  by  letting 
him  occupy  the  land  on  a  fixed  rental,  in  produce  or  in  money. 
This  process  is  gradual,  differing  according  to  the  general 
economic  conditions  of  each  country.  Ultimately,  however, 
the  last  trace  of  serfdom  disappears,  and  the  cultivator  be- 
comes the  hired  man  or  the  free  tenant  farmer. 

There  are  generally  five  steps  in  this  transition  from  slavery 
to  liberty:  (i)  the  acknowledgment  by  the  master  of  certain 
personal  rights  on  the  part  of  the  slave;  (2)  the  grant  to  the 
slave  of  certain  property  rights,  as  the  privilege  of  the  Roman 
slave  in  later  times  to  acquire  a  pecidium  or  independent  fund 
by  working  in  his  leisure  moments  for  himself;  (3)  the  confer- 
ring of  the  privilege  of  marriage,  whereby  the  master  abdicates 
the  right  of  breeding  human  beings  like  animals;  (4)  the  manu- 
mission of  the  slave,  while  reserving  certain  partial  rights  to 
his  services;  (5)  complete  emancipation  and  commutation  of 
all  services  into  a  fixed  money  rental. 

The  transition  from  slavery  to  serfdom  and  from  serfdom  to 
freedom  can  be  traced  in  Western  Europe,  where  the  increase 
of  population  and  the  resulting  diminution  of  fresh  land  forced 
the  adoption  of  better  methods  of  cultivation.     The  process 


.  1 60  Freedom  [§  67 

was  accelerated  by  the  growth  of  a  free  industry  and  com- 
merce in  the  towns;  and  although  temporary  mutations  caused 
the  landowners  here  and  there  to  resist  emancipation,  serfdom 
was  finally  abolished,  either  because  it  was  no  longer  really  prof- 
itable, or  because  the  community  now  recognized  the  greater 
need  and  value  of  the  free  industrial  workman.  In  the  first 
case,  as  in  England,  serfdom  died  a  comparatively  quiet  death; 
in  the  second  case,  as  on  the  Continent,  where  the  landowners 
were  more  tenacious  of  their  rights,  it  needed  a  revolution  to 
bring  about  the  disappearance  of  the  last  traces  of  serfdom. 

In  America,  where  at  first  only  the  fringe  of  the  arable  area 
was  occupied,  the  resulting  inability  to  secure  an  adequate 
labor  force  through  free  workmen,  apprentices  or  redemp- 
tioners  soon  led  to  the  adoption  of  slavery,  first  of  Indians, 
then  of  negroes.  In  the  Northern  states,  where  the  land  was 
poor  and  a  better  cultivation  necessary,  slavery  never  took  a 
deep  hold  except  on  the  plantations  of  Narragansett  Bay  and 
of  the  Hudson  valley.  In  the  South  both  climate  and  soil 
made  slavery  profitable.  As  the  seaboard  lands  became  poorer, 
the  continuance  of  slavery  depended  on  the  continual  acquisi- 
tion of  fresh  lands,  —  a  fact  that  led  to  the  Mexican  war  and 
the  attempts  to  secure  Cuba.  The  opening  of  the  lower  Miss- 
issippi valley  so  augmented  the  price  of  slaves  that  not  only 
the  older  seaboard  states,  but  even  many  of  the  hill  sections 
of  the  interior  commonwealths  where  slavery  would  never 
have  developed  of  its  own  accord,  now  found  it  to  their  inter- 
est to  raise  slaves  for  the  market;  and  from  that  time  the 
entire  South  was  practically  a  unit  in  favor  of  the  "peculiar 
institution."  The  South  was  forced  into  the  conflict  because 
it  well  realized  that  without  fresh  supplies  of  land  slavery  was 
doomed. 

Emancipation  came  as  a  war  measure;  but  even  without 
emancipation  at  that  time  slavery  would  soon  have  disappeared. 
Left  to  itself,  without  any  chance  of  territorial  expansion  in 
the  presence  of  a  more  vigorous  and  free  industrial  system, 


67]  Decay  of  Slavery  161 

slavery  would  slowly  have  become  unprofitable,  and  would 
have  changed  into  some  form  of  serfdom  to  be  ultimately  merged 
into  the  more  remunerative  system  of  freedom.  Lincoln's 
proclamation,  like  the  Czar's  ukase  of  the  same  decade,  accom- 
plished by  a  stroke  of  a  pen  what  it  had  taken  Western  Europe 
centuries  to  attain.  In  America  the  transition  was  an  economic 
revolution,  in  Russia  a  reform,  because  in  the  one  country 
slavery,  and  in  the  other  serfdom,  was  abolished.  In  both 
cases  the  change  in  the  law  only  slightly  anticipated  the  in- 
evitable result  of  a  fast-approaching  change  in  the  economic 
facts. 

The  disappearance  of  slavery  is  therefore  not  due  primarily 
to  moral  teachings.  The  greatest  moral  philosophers  of  Greece 
defended  slavery  because  they  could  not  conceive  of  a  social 
system  without  it;  the  clergymen  of  the  South  honestly  ap- 
pealed to  the  Bible  because  in  their  opinion  it  was  necessary 
to  social  stability.  The  ethical  defects  of  slavery  were  men- 
tioned by  many  Roman  writers,  but  it  was  not  until  its  eco- 
nomic shortcomings  were  realized  by  teachers  and  public  alike 
that  slavery  disappeared.  The  civil  war  was  indeed  borne 
on  the  waves  of  a  great  moral  uprising,  but  human  nature  in 
the  North  was  no  different  from  that  in  the  South,  and  had  the 
climatic  and  economic  conditions  of  the  North  been  like  those 
:of  the  South,  there  would  have  been  no  such  moral  uprising. 
■A  higher  morality,  it  is  true,  continually  transforms  social  life, 
:but  in  order  to  accomplish  lasting  results  it  must  be  in  intimate 
touch  with  the  great  underlying  economic  facts. 

With  the  virtual  exhaustion  of  free  land,  slavery  in  modern 
society  has  gone,  never  to  return.  It  is  only  in  a  few  of  the 
tropical  colonies  where  land  is  still  abundant  that  there  is  any 
possibility  of  its  continuance;  and  if  the  colonies  did  not  form 
iso  relatively  insignificant  an  appendage  of  modern  industrial 
states,  the  possibility  might  become  a  probability.  It  is  un- 
likely that  we  shall  see  anything  more  severe  than  the  carefully 
regulated   contract  labor  of  some  of  the   English  possessions. 


1 62  Freedom  [§  67 

Even  here,  however,  as  well  as  in  ihe  case  of  the  "culture" 
system  of  Java  and  the  peonage  of  Spanish  America,  care  must 
be  taken  not  to  permit  a  relapse  into  a  state  of  virtual  serfdom. 
Slavery  and  serfdom  have  been  defended  on  five  grounds, 
(i)  It  is  claimed  that  slavery  is  preferable  to  cannibalism;  that 
it  is  a  great  advance  to  spare  the  victim  rather  than  to  eat  him. 
It  is  forgotten,  however,  that  when  the  great  development  of 
slavery  came,  the  enslaving  part  of  mankind  had  long  passed 
out  of  the  cannibal  stage.  (2)  It  is  contended  that  slavery 
protects  labor,  and  that  in  the  middle  ages,  for  instance,  pro- 
tection was  more  important  than  freedom.  This  is,  however, 
an  assumption  which  from  the  point  of  view  of  the  workman 
cannot  be  proven.  (3)  It  is  said  that  slavery  inculcates  the 
habit  of  work.  There  is  no  doubt  that  some  of  the  negroes 
were  drilled  into  comparative  thrift  and  orderliness  in  the 
South.  But  this  assumes  that  nothing  else  would  effect  the 
same  result,  —  an  assumption  belied  in  all  countries  where 
free  labor  has  developed  independently.  It  also  forgets  that 
some  of  the  negroes  came  from  tribes  where  work  was  by  no 
means  unknown.  (4)  It  is  asserted  that  slavery  permits  the 
evolution  of  a  leisure  class.  This,  again,  is  based  on  aristocratic 
postulates.  It  completely  ignores  the  possibility  of  a  demo- 
cratic development  where  leisure  and  culture  will  no  longer  be 
the  possessions  of  a  favored  few.  (5)  Finally,  it  is  claimed 
that  compulsory  labor  is  necessary  for  the  economic  progress 
of  countries  where  the  natives  will  not  work.  This  argument 
overlooks  the  fact  that  the  ultimate  end  of  economic  progress 
is  man  rather  than  wealth,  and  that  every  resource  of  modern 
civilization  in  the  line  of  industrial  and  technical  education 
must  first  be  exhausted  before  the  claim  can  be  admitted. 
Labor  is  indeed  necessary  for  economic  progress,  but  a  so- 
called  progress  which  rests  on  the  perpetual  exploitation  of 
the  laborer  is  not  worth  having.  Slavery,  whether  total  or 
partial,  exerts  its  pernicious  and  insidious  influence  on  slave 
and    slaveholder    alike.     The    modern    conscience    refuses    to 


§68]  Economic  Liberty  163 

permit  it,  and  fortunately  the  economic  facts  are  almost 
everywhere  in  harmony  with  the  modern  conscience.  These 
economic  facts  rest  on  the  disappearance  of  free  land. 

68.  Liberty  of  Economic  Action 

While  bodily  freedom  is  thus  the  result  of  a  slow  develop- 
ment, the  liberty  of  economic  action  in  general  is  also  a  recent 
product.  Economic  liberty  of  both  kinds  has  been  evolved 
because  it  has  been  recognized  as  conducive  to  wealth  and 
general  progress  under  modern  conditions.  As  opposed  to 
the  theories  of  ancient  and  mediaeval  absolutism,  with  its  con- 
tinual interference  in  the  economic  life  of  the  individual,  the 
modern  doctrine  is  that  a  man  may  commonly  be  depended 
upon  for  utilizing  his  opportunities  and  turning  his  energies  to 
the  best  account;  that  an  adult  of  sound  mind  usually  knows 
what  is  most  advantageous  for  him,  and  that  in  making  the 
most  effective  use  of  his  own  abilities  he  will  ordinarily  do  the 
best  for  the  community.  It  involves  the  substantial  identity 
of  private  interest  and  public  welfare,  and  it  is  to-day  almost 
everywhere  in  the  civilized  world  either  an  accomplished  fact 
or  a  cherished  ideal. 

If  we  look  more  closely,  however,  we  shall  find  that  free- 
dom is  more  than  the  mere  absence  of  restraint  or  interference. 
In  contrast  to  this  mere  negative  conception  of  liberty,  as 
advanced  by  Spencer  and  adopted  by  the  average  man,  we 
must  put  the  positive  conception  as  framed  by  Green  and 
elaborated  by  recent  thinkers.  Economic  freedom,  like  all 
liberty,  is  not  an  attribute  of  primitive  man,  but  has  been  ham- 
mered out  by  centuries  of  toilsome  effort.  Individual  liberty  is 
the  product  of  social  effort.  If  it  is  to  be  a  constructive  rather 
than  a  destructive  force,  if  it  is  to  minister  to  social  progress 
rather  than  to  social  dissolution,  it  must  be  accompanied  by 
two  other  conditions. 

Of  these  the  first  is  equality.  By  equality  we  do  not  mean 
absolute   equality.     A   certain   degree   of  inequality  inheres  in 


164  Freedom  [§68 

the  nature  of  things.  Men  are  born  with  an  inequality  of 
physical,  mental  and  moral  attributes  which  no  amount  of 
care  can  eradicate;  and  as  soon  as  private  property  develops, 
these  natural  inequalities  inevitably  produce  their  results  in 
inequality  of  possessions.  The  real  equality  that  is  important 
for  economic  purposes  is  threefold:  first,  legal  equality,  or  the 
certainty  that  one  man  is  as  good  as  another  before  the  law, 
and  that  his  economic  rights  will  be  equally  protected;  sec- 
ondly, equality  of  opportunity,  in  the  sense  that  no  man  is  shut 
out  by  legislation  or  social  prejudice  from  free  access  to  any 
vocation  or  employment  for  which  he  deems  himself  fitted; 
thirdly,  such  a  relative  equality,  at  least  in  the  conditions  of 
bargaining,  as  not  to  put  one  party  to  the  contract  at  the  vir- 
tual mercy  of  the  other.  Without  such  a  threefold  equality 
freedom  becomes  illusory;  for  liberty  based  on  gross  inequality 
means  the  liberty  of  the  stronger  and  more  unscrupulous  to 
impose  his  will  on  the  weak.  Liberty  without  equality  is  the 
power  of  the  one,  but  the  subjection  of  the  other.  The  liberty 
to  invest  one's  capital  in  slaves  was  stoutly  defended  by  the 
ante-bellum  Southerner,  but  his  liberty  involved  the  other's 
slavery. 

In  addition  to  equality  the  growth  of  competition  and  the 
complexity  of  modern  economic  life  have  brought  into  promi- 
nence a  second  condition  of  liberty.  The  enormous  power 
exerted  to-day  by  the  accumulations  of  capital  as  well  as  by  the 
combinations  of  labor  is  in  the  present  state  of  human  devel- 
opment peculiarly  susceptible  of  abuse.  These  abuses  may  be 
within  the  margin  of  the  law,  and  yet  none  the  less  socially 
reprehensible.  Unless  great  power  is  tempered  by  responsi- 
bility, it  is  apt  to  run  wild.  We  are  beginning  to  hear  of  the 
responsibilities  of  wealth,  but  the  adage  noblesse  oblige  applies 
to  all  forms  of  economic  power,  whether  represented  by  wealth 
or  not.  What  is  needed,  and  what  is  gradually  being  devel- 
oped, is  the  sense  of  social  solidarity;  in  other  words,  the  con- 
viction that  no  one  can  really  dissociate  himself  from  the  wel- 


§  69]         Kinds  of  Economic  Freedom  165 

fare  of  his  neighbors,  and  that  his  every  action  must  be  judged 
by  its  influence  on  society  at  large.  It  was  this  idea  that  found 
vague  expression  in  the  "fraternity"  of  the  French  revolution; 
it  is  the  same  idea  that  is  again  more  forcibly  advanced  to-day 
under  other  names.  The  application  in  the  economic  sphere 
is  no  less  valid  than  in  others.  Liberty  without  responsibility 
is  license. 

Real  economic  liberty,  therefore,  is  constructive  in  that  it 
implies  not  simply  an  absence  of  restraint,  but  such  a  positive 
complex  of  conditions,  resting  on  law  and  custom,  as  to  insure 
to  the  greatest  possible  number  the  opportunity  of  a  free  de- 
velopment of  their  faculties.  Liberty,  when  based  on  equality 
and  responsibility,  means  wealth  for  the  individual  and  prog- 
ress for  society;  liberty  without  equality  and  responsibility 
may  mean  advance  for  the  few  and  retrogression  for  the  many. 
Liberty  as  a  negative  concept  is  disruptive;  liberty  as  a  posi- 
tive concept  harmonizes  society  and  the  individual;  the  one  is 
a  menace,  the  other  an  aid,  to  lasting  economic  progress. 

69.   Various  Kinds  of  Economic  Freedom 

(i)  The  first  and  most  obvious  form  of  freedom  is  that  of 
marriage  and  divorce.  Marriage  indeed  is  far  more  than  an 
economic  contrivance,  even  though  the  historical  forms  of 
marriage  have  been  influenced  by  economic  forces  .to  a  greater 
extent  than  is  commonly  recognized.  Freedom  of  marriage 
especially  is  a  product  of  the  modern  economic  life.  Restric- 
tions on  the  right  of  marriage  were  in  the  middle  ages  an  attri- 
bute of  personal  subjection,  and  were  utilized  as  fiscal  resources 
by  the  lord.  Even  with  the  advent  of  physical  freedom,  how- 
ever, we  find  the  right  of  marriage  dependent  on  certain  prop- 
erty qualifications,  as  in  Southern  Germany  at  the  beginning 
of  the  nineteenth  century.  This  also  was  merely  a  survival 
of  aristocratic  traditions,  —  like  the  still  existing  property 
qualifications  for  marriage  in  the  case  of  army  officers  in  con- 
tinental   Europe.     Freedom    of    divorce,    on    the    other    hand, 


1 66  Freedom  [§69 

existed  in  early  society,  but  was  at  first  based  on  inequality. 
After  the  patriarchal  and  modern  family  had  been  constituted 
the  husband  could  divorce  the  wife,  but  not  vice  versa.  The 
newer  right  of  divorce  which  rests  on  equality  is  in  large  meas- 
ure the  result  of  the  economic  emancipation  of  woman.  Into 
the  wider  ethical  and  religious  aspects  of  this  great  problem 
the  present  is  not  the  place  to  enter. 

(2)  Next  we  have  freedom  of  movement.  In  the  middle 
ages  the  right  of  internal  migration  was  often  restricted.  Under 
the  settlement  laws  in  England,  for  instance,  it  was  virtually 
impossible  for  a  workman  to  leave  his  native  parish.  In  mod- 
ern times  the  growth  of  freedom  has  brought  the  right  not 
only  of  internal  but  of  international  migration.  The  restric- 
tions on  emigration  still  existing  in  Russia,  for  instance,  are 
a  relic  of  mediasvalism.  On  the  other  hand,  the  prohibition 
of  immigration  which  is  sometimes  found  in  modern  countries 
must  be  judged  in  the  light  of  liberty  in  the  positive  sense,  as 
explained  in  the  preceding  section.  Chinese  immigration  into 
the  United  States,  for  instance,  is  forbidden.  Cheap  Chinese 
labor  would  undoubtedly  help  in  developing  the  resources  of 
the  Pacific  slope;  but  the  vital  objection  to  it  is  the  permanent 
inequality  between  the  Chinese  and  the  American  workman. 
Immigration  in  general  is  to  be  welcomed  in  a  young  country 
like  America  with  relative  underpopulation,  because  even 
though  the  standard  of  hfe  of  the  immigrant  may  be  lower 
than  that  of  the  native,  he  or  his  children  will  soon  reach  the 
American  level.  The  Chinaman,  however,  refuses  to  assimilate, 
and  will  not  adopt  American  methods.  He  retains  and  per- 
petuates his  lower  standard,  and  thus,  if  present  in  sufficient 
numbers,  would  inevitably  drag  the  American  standard  down  to 
his  own  level.  Freedom  of  immigration,  which  in  this  case 
means  prosperity  for  the  employer  and  comparative  comfort 
for  the  immigrant,  implies  permanent  degeneration  for  the 
American  workman  and  thus  ultimate  economic  decay.  It  is 
a  specious  liberty,  because  based  on  inequality. 


§69]         Kinds  of  Economic  Freedom  167 

When,  however,  there  is  any  prospect  of  speedy  equality  and 
the  immigration  is  not  artificially  fostered  by  foreign  govern- 
ments or  interested  transportation  agencies,  interference  with 
the  freedom  of  immigration  is  uneconomic.  This  was  the 
error  of  the  Know-nothings  in  the  fifties,  as  it  is  of  the  anti- 
immigrationists  at  present  in  the  United  States.  That  the  low- 
class  immigrant  is  the  chief  source  of  supply  of  the  sweat-shops 
and  in  many  respects  complicates  the  labor  problem  is  un- 
doubtedly true  and  ominous.  The  remedy,  however,  consists 
not  in  abolishing  immigration,  or  even  in  restricting  it  ma- 
terially, but  in  raising  the  standard  of  pay  and  conditions  of 
work  through  labor  organization,  public  opinion  and  legal  en- 
actment, and  in  making  this  possible  by  increased  production 
and  successful  enterprise.  In  a  period,  indeed,  where  the 
labor  market  is  already  overstocked,  the  force  of  this  argu- 
ment will  be  much  impaired.  As  a  consequence  the  law  of  192 1 
limited  immigration  into  the  United  States  to  three  per  cent  of 
each  nationality  now  in  the  country. 

(3)  We  come  next  to  the  freedom  of  occupation.  The  right 
of  choosing  one's  profession  was  in  former  times  hedged  in 
by  all  manner  of  barriers.  At  its  worst  the  system  of  caste 
and  custom  prevented  progress  because  it  put  men  into  voca- 
tions for  which  they  were  not  fitted.  Freedom  of  occupation 
insures  as  far  as  possible  the  right  man  for  the  right  place,  and 
this  leads  to  enhanced  production  and  better  distribution.  The 
only  restriction  which  modern  society  permits  is  the  evidence 
of  fitness,  in  those  occupations  where  incompetence  would 
imply  irresponsibility  and  involve  injury  to  others  as  well  as 
to  oneself.  The  certificates  required  from  doctors,  dentists, 
engineers,  plumbers,  pilots  and  the  like  are  not  a  hindrance, 
but  an  aid,  to  true  liberty.  The  apprenticeship  regulations  of 
the  trade  unions,  however,  are  sometimes  good,  sometimes  bad. 
Where  they  are  designed  to  insure  good  work,  or  even  to  pre- 
vent the  degradation  of  wages  and  the  workman's  standard  of 
life  through  the  irruption  of  large  numbers  of  underpaid  ap- 


J  68  Freedom  [§69 

prentices,  there  is  much  to  be  said  for  the  practice.  But  when 
the  object  is  simply  to  keep  out  competent  workmen  and  to 
erect  a  monopoHstic  closed  corporation,  as  in  the  late  stages 
of  the  guild  system,  the  limitation  is  clearly  indefensible. 

(4)  Another  kind  of  freedom  is  the  freedom  of  association. 
The  chief  forms  of  association  for  economic  purposes  are  com- 
binations of  labor  and  combinations  of  capital.  In  classic 
Rome,  as  in  modern  Russia,  where  both  political  and  economic 
aims  were  sought  we  find  a  stern  repression  of  labor  associa- 
tions. Even  after  the  right  of  political  and  religious  asso- 
ciation had  been  won,  however,  combinations  of  labor  were 
prohibited.  Under  the  modern  factory  system  such  combina- 
tions have  assumed  the  form  of  trade  unions.  It  was  not  untU 
1824  in  England,  and  considerably  later  in  America  and  con- 
tinental Europe,  that  the  prohibition  was  removed.  The  legiti- 
macy of  union,  as  such,  is  now  accepted  because  it  is  recognized 
that  it  tends  to  secure  the  real  freedom  of  the  laborer.  The 
individual  workman  in  a  large  factory  is  at  a  clear  disadvantage 
in  dealing  with  the  employer;  the  union,  as  we  shall  see  (§  i8o), 
restores  the  equality  by  securing  the  right  of  collective  bar- 
gaining. In  the  same  way  the  right  of  free  association  of  capi- 
tal in  the  form  of  corporations  and  other  combinations  has 
been  acquired  chiefly  in  the  past  half-century.  Here  again, 
however,  when  the  nominal  liberty  of  association  results  in  a 
"restraint  of  trade"  or  virtual  monopoly  inimical  to  the  general 
interests,  the  community  is  justified  in  curbing  its  excesses 
whenever  the  contest  involves  a  crass  inequality  or  is  con- 
ducted without  any  sense  of  social  responsibility.  The  greatest 
care,  however,  must  be  observed  in  the  analysis  before  the  in- 
fringement of  the  right  of  association  can  be  conceded.  To 
abandon  liberty  because  of  a  mere  apprehended  but  imaginary 
inequality  would  be  to  sacrifice  both  liberty  and  equality.  A 
clear  case  must  be  made  out  before  the  law  should  be  invoked 
against  the  combinations  of  either  labor  or  capital. 

(5)  The  fifth  category,  freedom  of  consumption,  needs  only 


§69]         Kinds  of  Economic  Freedom  169 

a  word  in  this  place.  The  sumptuary  laws  of  old  which  pre- 
scribed in  detail  what  should  be  eaten  or  worn  were  sometimes 
well  intentioned,  but  always  mistaken.  By  restricting  the  ex- 
pansion of  wants,  they  really  checked  economic  progress. 
Modern  society  has  abandoned  such  a  system  completely,  and 
where  it  becomes  desirable  in  the  interests  of  the  public  health 
or  safety  to  prohibit  the  use  of  certain  commodities,  like  over- 
ripe fruit,  or  infected  meat,  or  opium,  the  end  is  attained  far 
better  by  a  prohibition  of  sale,  under  the  police  power  of  the 
state,  than  by  a  restriction  of  consumption. 

(6)  We  come,  sixthly,  to  freedom  of  production,  including 
freedom  of  contract  and  enterprise.  Here,  again,  the  emphasis 
has  been  shifted  in  modern  times.  The  world  has  outgrown 
the  time-worn  conception  of  the  citizens  as  the  children  of  an 
all-wise  and  benevolent  paternal  government.  It  has  been 
realized  that  governments  are  not  always  benevolent  and  never 
all-wise,  and  that  with  the  growth  of  capital  and  competition 
better  results  can  be  secured  by  the  repeal  of  the  complicated 
and  often  contradictory  provisions  which  throttle  production 
and  check  individual  initiative.  It  was  this  that  the  French 
manufacturers  meant  when  they  told  Colbert  "  laissez-nous 
faire"  and  thus  introduced  a  celebrated  phrase.  That  was 
indeed  the  necessary  destructive  process  of  pulling  down  the 
barriers  which  impeded  progress  because  they  checked  equal 
opportunity.  It  has  been  found  requisite,  however,  in  recent 
times  to  modify  both  the  theory  and  the  practice  of  laissez- 
faire  in  order  to  safeguard  the  interests  of  various  classes  of 
society.  The  complex  requirements  of  modern  life  have  ne- 
cessitated a  governmental  regulation  of  many  business  enter- 
prises in  behalf  of  producers,  of  consumers,  of  investors  or  of 
the  general  public.  The  difference  between  mediaeval  and 
modern  interference  is  to  be  found  chiefly  in  the  fact  that  the 
one  sought  to  prevent  competition  while  the  other  endeavors 
to  enlarge  its  domain  and  to  raise  its  level.  The  only  excep- 
tion to  the  rule  that  rational  modern  interference  is  not  de- 


1 70  Freedom  [§  69 

signed  to  prevent  competition  is  found  in  those  few  cases 
where  competition  itself  becomes  wasteful  and  inefificient. 
The  modern  aim,  however,  is  always  to  increase  liberty  through 
the  attainment  of  equality  and  responsibility.  Factory  laws 
give  the  operatives  a  fair  chance;  railway  regulation  attempts 
to  secure  equal  treatment  of  shippers;  supervision  of  banks, 
insurance  companies  and  other  corporations  is  designed  to  en- 
force financial  responsibility.  In  all  these  cases  interference 
is  justified  only  as  leading  to  a  surer  and  greater  general 
liberty.  We  have  to  deal  with  the  positive,  not  the  negative, 
conception. 

(7)  Finally,  we  have  freedom  of  trade.  This  is  virtually 
included  under  the  last  head,  since  trade  is  a  species  of  pro- 
duction. It  forms,  however,  so  important  a  part  of  the  subject 
that  it  has  generally  been  treated  separately.  The  modern  age 
has  seen  the  emancipation  of  internal  commerce  from  mediaeval 
restrictions  of  all  kinds.  The  great  controversy  to-day  centres 
about  international  trade.  Here,  again,  the  general  hypothesis 
must  be  in  favor  of  freedom.  Free  trade,  however,  is  not 
necessarily  and  always  beneficent.  If  the  relative  inequality  of 
two  countries  in  the  production  of  a  certain  commodity  is 
great,  free  trade  may  hinder  in  the  weaker  country  the  growth 
of  an  industry  which  might  become  relatively  profitable  or 
even  highly  necessary.  Under  such  conditions  protection,  by 
building  up  the  industry  to  the  point  where  there  will  be  a 
domestic  competition,  may  help  in  creating  that  relative  equal- 
ity between  the  domestic  and  the  foreign  producer  which  will 
ultimately  redound  to  the  interests  of  the  consumer  as  well. 
As  we  shall  see  later,  however  (§  214),  such  a  policy  is  defensible 
only  when  protection  actually  increases  real  productive  effi- 
ciency, and  when  the  undoubted  intermediate  economic  loss 
does  not  outweigh  the  ultimate  advantage.  Only  in  such  a 
case  is  interference  with  freedom  legitimate,  because  only  then 
is  it  in  the  interests  of  a  more  real  and  beneficent  ultimate 
freedom. 


§  7o]  Individual  Liberty  171 

70.   Individual  Liberty  as  a  Social  Concept 

We  see,  then,  that  in  modern  life  liberty  is  a  result  rather 
than  a  cause.  It  does  not  mean  simply  the  absence  of  restraint; 
for  that  is  license,  not  liberty.  All  social  progress  is  the  result 
of  a  certain  restriction  of  the  liberty  of  some  in  the  interest  of 
all.  These  restrictions  are  imposed  by  custom,  by  voluntary 
association,  by  law.  Good  manners  and  social  usages  which 
prevent  men  from  doing  what  they  like  are  a  mark  of  civiliza- 
tion. Associations  like  the  church,  the  clubs  and  business 
unions  lay  down  rules  to  which  each  member  must  conform. 
Government  enacts  many  laws  whose  wisdom  is  unquestioned 
and  obedience  to  which  is  compulsory.  In  every  case  there 
is  necessarily  an  infraction  of  liberty  in  the  crude  sense.  More- 
over, especially  in  industrial  matters,  the  cry  of  individual 
liberty  often  becomes  a  mere  shibboleth  invoked  by  the  indi- 
viduals against  others  instead  of  themselves.  The  railway 
magnate  restricts  his  own  liberty  by  pooling  arrangements, 
but  objects  to  interference  by  the  shipper.  The  slave  owner 
wanted  freedom  of  trade,  but  scouted  freedom  of  man.  The 
manufacturer  demands  protection  against  his  foreign  competi- 
tor, but  objects  to  factory  laws.  The  cotton  grower  acclaims 
the  rise  of  prices  brought  about  by  manipulation  on  the  ex- 
change, while  the  spinner  decries  the  liberty  of  speculation. 
The  factory  owner  joins  the  selling  bureau  which  restricts  out- 
put or  fixes  prices,  but  objects  to  the  "tyranny"  of  the  labor 
union.  The  labor  union  adopts  provisions  relating  to  appren- 
ticeship, the  open  shop  and  the  boycott,  but  opposes  lockouts 
and  trusts.  The  lawyer  refuses  to  consort  with  the  "shyster" 
and  the  doctor  with  the  quack,  because  they  desire  to  main- 
tain the  standard  of  their  professions;  but  they  sternly  repro- 
bate the  effort  of  the  trade  unionist  to  prevent  the  "scab"  from 
reducing  the  level  of  his  occupation. 

Liberty,  then,  must  be  looked  at  from  the  social  as  well  as 
from  the  individual  point  of  view.     The  individual  has  become 


172  Freedom  [§  70 

what  he  is  hirgely  through  associated  effort.  This,  however, 
inevitably  implies  a  certain  subjection  of  the  individual  to  the 
group.  The  liberty  which  is  compatible  with  social  progress 
involves  the  readiness  of  the  individual  to  work  for  a  common 
end.  .  If  this  readiness  is  not  voluntary,  it  must  be  developed 
by  persuasion  or  by  force.  All  liberty  is  a  balancing  between 
the  powers  of  anarchy  and  of  tyranny.  Individual  freedom 
that  is  oblivious  of  the  rights  of  others  or  of  the  best  interests 
of  the  majority  leads  to  an  anarchy  that  is  destructive  of  real 
liberty;  group  restrictions  that  are  forgetful  of  the  possibilities 
of  the  individual  lead  to  a  tyranny  that  is  equally  destructive 
of  real  liberty.  From  the  economic  point  of  view  only  that  is 
real  freedom  which  is  calculated  to  reconcile  the  greatest  possi- 
ble production  in  the  group  with  the  greatest  possible  con- 
sumption of  every  individual  within  and  without  the  group. 
The  liberty  of  one,  therefore,  must  not  endanger  the  economic 
progress  of  others. 

Just  as  the  political  interpretation  of  liberty  is  democracy 
in  government,  so  the  economic  liberty  which  is  conducive  to 
progress  can  exist  only  with  a  relative  economic  democracy. 
It  implies  at  least  economic  opportunity,  and  opportunity 
depends  on  a  certain  degree  of  equality  and  responsibility. 
In  this  sense  the  best  government  is  not  that  which  governs 
least,  but  the  one  which  secures  the  surest  conditions  of  a  wider 
ultimate  freedom.  Economic  liberty  in  the  last  analysis 
is  the  result  of  action,  not  of  inaction. 


Part   III 
Structure  and  Process  of  Economic  Life 


Book  I 
Value:  General  Principles 


CHAPTER   XII 
THE  MEANING  OF  VALUE 

71.   References 

W.  Smart,  Introduction  to  the  Theory  of  Value  (1911),  chs.  ii-viii;  J.  B. 
Clark,  Philosophy  of  Wealth  (1886),  ch.  v.,  and  Distribution  of  Wealth 
(1899),  chs.  xv-xvii;  M.  Pantaleoni,  Pure  Economics  (1899),  part  i,  ch. 
iv;  A.  Marshall,  Principles  (1910),  bk.  iii;  N.  G.  Pierson,  Principles 
(1902),  part  I,  ch.  i,  §  3;  W.  S.  Jevons,  Theory  (1911),  ch.  iii;  F.  A. 
Fetter,  Economic  Principles  (191 5),  part  i;  E.  v.  Bohm-Bawerk,  Positive 
Theory  of  Capital  (1891),  bk.  iii,  chs.  i-ix;  F.  v.  Wieser,  Natural  Value 
(1893),  bk.  i;  C.  M.  Walsh,  Measurement  of  General  Exchange  Value 
(1901),  ch.  i;  H.  J.  Davenport,  Value  and  Distribution  (1908),  ch. 
xvii;  P.  H.  Wicksteed,  The  Commonsense  of  Political  Economy  (1910), 
chs.  i,  ii;   B.  M.  Anderson,  Jr.,  Social  Value  (191 1). 

72.   Original  Meaning  of  Value 

Value  is  the  Latin  term  corresponding  to  the  Saxon  "worth." 
The  fundamental  idea  which  underlies  worth  is  capacity  to 
satisfy  a  want.  If  we  need  a  nail,  but  hnd  a  broken  one,  we 
say  that  it  is  worth  nothing,  —  that  it  is  valueless,  or  not  avail- 
able, for  our  purpose.  Value  or  worth  thus  implies  usefulness 
or  utility.     The  nail  is  valueless  for  us;    if  it  "avails"  nothing, 

173 


174  Meaning  of  Value  [§72 

it  is  of  no  use.  Since  value  implies  capacity  to  satisfy  wants, 
there  are  as  many  kinds  of  value  as  there  are  classes  of  wants. 
Things  have  a  scientific  value,  an  aesthetic  value,  a  religious 
value,  a  philosophic  value,  a  political  value  and  so  on.  The 
value  with  which  economics  has  to  deal  is  economic  value — 
a  small  subdivision  of  the  whole.  As  this  is  a  treatise  on 
economics,  we  shall  hereafter  use  the  term  value  in  the  sense 
of  economic  value,  that  is,  the  value  of  anything  for  economic 
purposes.  But  just  as  we  know  (§  2)  that  the  economic  life 
is  not  the  whole  life,  so  we  must  not  confound  economic  value 
with  value  in  general.  When  we  defined  economics  at  the 
close  of  section  4  as  the  science  of  value,  it  must  be  remem- 
bered that  what  is  meant  is  the  science  not  of  all  value,  but 
only  of  economic  value. 

Incidentally  we  may  point  out  the  original  dependence  of 
moral  considerations  on  economic  facts.  A  thing  was  at  first 
"good"  in  the  economic  sense,  as  we  still  employ  the  phrase 
a  stock  of  goods  and  commodities.  The  ethical  use  of  good 
came  much  later.  In  popular  parlance  we  still  speak  of  the 
broken  nail  as  "no  good,"  without  desiring  to  pass  any  moral 
judgment  on  it.  In  the  same  way  the  original  concept  of  "dear" 
was  not  ethical,  but  economic.  A  commodity  may  still  be 
dear  even  if  we  do  not  love  it.  So  also  what  is  ethically  pre- 
cious to  us  was  originally  of  economic  importance;  we  still  speak 
of  precious  stones  in  this  economic  sense.  To-day  we  esteem 
somebody,  when  originally  we  put  a  money  value  on  him 
(aestimarc,  from  aes,  money).  In  modern  times  we  appre- 
ciate a  quality,  but  at  first  we  set  a  price  on  it  {ad-pretium) . 
In  fact,  so  fierce  was  the  struggle  for  existence  among  the  early 
Romans,  so  important  for  their  very  stability  was  the  quality 
of  bravery,  that  the  thing  of  chief  value  to  them,  the  charac- 
teristic which  "availed"  the  most,  was  "valor,"  a  term  which 
has  now  become  with  us  of  exclusively  ethical  import. 

This  close  connection  of  ethics  and  economics  must,  how- 
ever, as  we  have  seen,  not  blind  us  to  the  fact  that  the  real 


§  73]  Marginal  Utility  17^ 

subject  of  our  discipline  is  economic.  The  utility  with  which 
we  have  to  deal  is  the  economic  utility,  the  capacity  of  a  thing 
which  we  must  economize  in  order  to  satisfy  a  want.  The 
use  of  whisky  may  be  ethically  reprehensible,  but  as  long  as  men 
desire  it,  and  as  long  as  they  must  be  economical  with  it,  that 
is,  as  long  as  it  is  not  a  free  good,  but  an  economic  good,  whisky 
will  have  an  economic  usefulness,  —  it  will  be  used  to  satisfy 
the  craving  for  drink;  and  it  will  have  a  value  in  the  market. 
The  ethical  judgment  of  the  community  may  indeed  affect 
the  economic  situation.  The  practice  of  drinking  to  excess 
may  be  visited  with  such  severe  social  reprobation  that  the 
appetite  for  drink  may  be  held  in  check,  and  the  utility  of  whisky 
will  then  diminish  because  the  desire  for  it  will  have  decreased. 
The  study  of  human  wants  is  largely  a  matter  of  social  psy- 
chology, and  the  character  of  human  wants  is  continually  being 
modified  by  moral  considerations;  but  when  we  are  dealing  with 
the  serviceableness  of  a  commodity  for  satisfying  want,  we  are 
operating  with  economic  quantities.  The  economist  must 
continually  bear  in  mind  the  moral  aspects  of  the  situation  as 
modifying  the  conditions;  but,  the  conditions  once  given,  the 
economic  problem  is  a  thing  by  itself. 

As  a  preliminary  definition,  then,  we  may  say  that  the  value 
of  anything  is  the  expression  of  our  estimate  of  its  utility, 
meaning  by  utility  its  capacity  to  satisfy  human  wants. 

73.   Marginal  Utility  —  The  Law  of  Diminishing  Utility 

It  is  obvious  that  this  definition  is  incomplete.  Iron  is  more 
useful  than  diamonds,  yet  diamonds  are  incontrovertibly  more 
valuable.     In  what  sense  is  value  an  expression  of  utility? 

If  a  starving  wayfarer  suddenly  spies  an  apple,  it  will  have  a 
supreme  utility  for  him  because  it  stands  between  him  and 
death.  If  he  finds  a  second  apple,  it  will  still  be  welcome,  but 
will  fill  a  somewhat  less  intense  want.  With  every  additional 
apple  his  appetite  will  be  more  appeased,  until  with  let  us  say 
the  tenth  apple  he  will  reach  the  point  where  he  will  be  on  the 


176  Meaning  of  Value  [§73 

margin  of  doubt  whether  to  consume  any  more.  The  utility 
of  each  apple  —  its  capacity  to  satisfy  his  desire  —  has  di- 
minished until  the  tenth  apple  is  the  last  which  affords  any 
utility  at  the  moment.  The  utility  of  this  tenth  apple  is  called 
final  because  it  is  the  final  apple,  or  marginal  because  on  the 
margin  of  desire. 

It  is  plain  that  the  marginal  utility  of  any  apple  depends 
on  the  quantity  at  one's  disposal.  The  greater  the  quantity, 
the  less  keenly  will  he  feel  the  particular  want.  If  he  had  only 
five  apples,  the  utility  of  the  fifth,  that  is,  the  marginal  utility, 
would  be  considerable  because  his  last  want  satisfied  would 
still  be  urgent.  The  degree  of  marginal  utility  depends  on  the 
strength  of  the  want  last  satisfied,  or,  it  might  be  said,  on  the 
need  we  have  of  more. 

The  second  point  is  that  at  any  given  time  the  utility  of 
each  apple  is  equal  to  that  of  the  last  and  therefore  to  that  of 
any  other  (of  the  same  size  and  quality).  If  the  available 
supply  is  five  apples,  any  one  of  the  five  may  be  considered 
the  marginal  unit,  that  is,  the  last  unit  in  point  of  time.  The 
wayfarer  will  lay  his  hands  on  any  one  of  the  five  without  par- 
ticular choice;  whether  he  begins  with  one  or  with  another  is 
immaterial,  because  he  knows  that  one  is  as  good  as  another. 

Thirdly,  in  estimating  the  utility  of  the  entire  supply  of 
apples,  we  must  distinguish  between  the  total  utility  and  the 
effective  utility  of  the  stock,  that  is,  the  utility  which  is  of  any 
effect  when  we  compare  given  quantities  of  different  goods. 
The  total  utility  of  a  stock  is  obtained  by  adding  the  utility  of 
each  apple  to  that  of  its  predecessor.  It  will  accordingly  grow 
until  the  point  of  satiety  has  been  reached.  Ten  apples  possess 
more  total  utility  than  five.  The  effective  utility  of  the  stock, 
however,  is  equal  to  the  marginal  utility  of  the  final  unit  mul- 
tiplied by  the  number  of  units.  The  effective  utility  of  four 
apples  is  four  times  the  marginal  utility  of  the  fourth.  The 
effective  utility  of  the  stock  grows,  but  not  up  to  the  point  of 
satiety;    after  a  limit  has  been  reached,  it  begins  to  decline. 


§73]  Marginal  Utility  177 

The  effective  utility  of  eight  apples  may  be  less  than  that  of 
five,  even  though  the  total  utility  is  undoubtedly  more. 

This  can  be  made  clear  when  we  remember  that  we  have 
many  wants  and  that  the  degree  in  which  things  satisfy  our 
wants  depends  on  their  relative  importance.  In  addition  to 
apples,  the  wayfarer  needs  other  kinds  of  food,  clothing  and 
shelter.  If  he  has  only  five  apples,  his  desire  for  them  may  be 
so  strong  that  he  thinks  of  nothing  else;  but  if  he  has  eight 
apples,  his  desire  for  the  apples  may  be  overtaken  by  his  desire 
for  let  us  say  three  articles  of  clothing.  If  there  were  a  hun- 
dred apples  at  his  disposal,  knowing  that  he  had  sufficient  for 
many  future  meals,  he  would  turn  his  attention  almost  entirely 
to  still  other  needs.  Air,  for  instance,  is  indispensable  to  life, 
but  it  is  so  abundant  that  it  has  no  marginal  utility  at  all  and 
hence  no  effective  utility,  although  its  total  utility  is  limitless. 
If  the  supply  of  air  was  shut  off,  however,  he  would  abandon  one 
by  one  his  other  needs,  until  finally  his  only  desire  would  be 
for  air.  In  other  words,  as  long  as  he  thinks  chiefly  of  apples, 
which  he  will  do  as  long  as  he  can  get  only  five,  he  wants  all 
five;  but  as  soon  as  he  thinks  of  other  things  (which  he  will  do 
when  there  are  say  eight  apples)  the  less  will  be  the  impor- 
tance which  he  will  attach  to  the  eight.  The  smaller  the 
number  of  units,  the  more  rapid  will  be  the  rise  in  their  margi- 
nal utility.  If  in  the  case  of  five  apples  the  marginal  utility  of 
each  is  five  units  of  satisfaction,  the  effective  utility  of  the  stock 
will  be  five  times  five,  or  twenty-five;  but  if  in  the  case  of  eight 
apples  the  marginal  utility  falls  to  three,  the  effective  utility  of 
the  stock  will  be  eight  times  three,  or  twenty-four.  Yet  the 
total  utility  of  eight  apples  is  certainly  more  than  that  of  five. 

It  is  important  to  note,  moreover,  that  the  word  margin 
is  used  in  two  senses,  or,  rather,  that  there  are  two  different 
kinds  of  margins.  When  we  speak  of  the  marginal  use  of  a 
commodity  to  any  one,  we  think  of  him  as  on  the  brink  of  not 
wanting  any  more.  He  may  reach  the  margin  because,  with 
the  diminishing  utility  of  each  increment,  he  will,  if  the  supply 


178  Meaning  of  Value  [§  73 

is  large  enough,  come  to  the  point  where  there  will  be  no 
consciousness  of  any  economic  usefulness  at  all.  The  margin 
becomes  a  margin  between  the  economic  world  and  the  non- 
economic  world,  a  margin  between  the  sphere  of  economizing 
and  that  of  unconcern  or  waste.  On  the  other  hand,  when  the 
supply  is  limited,  the  diminishing  utility  of  each  increment  will 
be  arrested  at  a  point  below  which  the  consumer  will  prefer  to 
abandon  the  use  of  an  increment  for  something  else.  The 
margin  here  is  a  margin  of  indifference  between  an  increment 
of  one  commodity  and  an  increment  of  another  commodity. 
Since  these  increments  are  not  necessarily  the  same,  the  mar- 
gin of  indifiference  may  be  reached  at  a  point  where  the  tenth 
increment  of  one  commodity  balances  the  twentieth  of  another, 
where,  in  other  words,  the  marginal  utility  of  the  one  commod- 
ity is  twice  that  of  the  other.  Both  marginal  increments  will 
still  possess  a  positive  utility.  This  second  kind  of. margin  is 
an  economic  margin,  that  is,  a  margin  or  border  between  two 
or  more  economic  goods,  not  as  in  the  first  case  a  margin  be- 
tween economic  and  non-economic  goods.  The  first  kind  of 
margin,  where  we  compare  different  increments  of  the  same 
thing,  may  be  called  the  non-economic  margin,  because  at  the 
margin  the  utility  is  zero  and  the  commodity  is  no  longer  an 
economic  good.  The  second  kind  of  margin,  where  we  com- 
pare the  same  or  different  increments  of  different  things,  may 
be  called  the  economic  margin,  because  at  the  margin  the 
utility  of  each  thing  is  still  measurable  and  appreciable.  We 
shall  have  repeated  occasion  to  call  attention  to  the  errors 
that  result  from  confusing  these  two  kinds  of  margins. 

To  recapitulate:  the  utility  of  a  commodity  is  called  mar- 
ginal because  the  desire  for  additional  quantities  must  some- 
time reach  a  limit  or  margin  as  compared  with  the  desire  for 
other  commodities.  There  is  always  one  unit  in  the  supply 
which  marks  the  margin  of  this  desire;  and  with  every  change 
in  the  supply  or  the  desire,  the  margin  will  move  up  or  down. 
This  unit  is  called  the  marginal  unit  or  increment.     With  a 


§  74]  Individual  and  Social  1 79 

fixed  quantity  the  utility  of  each  unit  or  increment  is  for  prac- 
tical purposes  equal  to  that  of  the  marginal  unit,  because  if  any 
unit  were  withdrawn  the  final  unit  would  naturally  be  put  in 
its  place.  The  real  loss  would  be  the  loss  of  the  marginal  unit. 
Value,  then,  is  not  simply  the  expression  of  utility  in  general, 
but  of  marginal  utility.  When  we  speak  of  the  value  of  a  com- 
modity, we  think  not  of  its  usefulness  in  general,  but  of  the 
utility  of  a  definite  quantity  as  compared  with  other  goods; 
and  in  so  doing,  we  think  not  of  the  total  utility  of  this  quan- 
tity in  itself,  but  of  its  effective  utility,  that  is  of  the  utility  of 
the  marginal  unit  multiplied  by  the  number  of  units. 

74.    Individual  and  Social  Value 

Value  as  a  universal  conception  would  be  true  of  the  indi- 
vidual living  apart  from  society,  if  there  were  any  such  beings. 
The  estimate  put  by  the  individual  on  one  commodity  as  com- 
pared with  another  is  the  foundation  of  all  value.  Robinson 
Crusoe  would  assign  a  value  to  apples  as  compared  to  nuts,  the 
value  of  each  being  in  agreement  with  their  marginal  utility  to 
him.  As  a  matter  of  fact,  however,  we  live  in  society,  not  on 
a  desert  island.  Economics,  as  a  social  science,  treats  of  the 
relation  of  man  to  man,  of  class  to  class.  The  value  with 
which  we  deal  is  therefore  the  result  of  social  forces.  It  is 
society  as  a  whole  which  sets  a  value  on  things.  Society  is 
indeed  composed  of  individuals,  but  it  is  the  aggregate  of  in- 
dividual wants  that  shapes  value.  The  want  of  the  individual 
alTects  value  only  as  it  influences  this  aggregate.  If  a  rich 
maniac,  for  instance,  should  offer  a  thousand  dollars  for  a  com- 
mon spoon  for  which  every  other  person  would  give  only  five 
cents,  his  subjective  estimate  would  have  no  appreciable  in- 
fluence on  the  value  of  the  spoon,  and  if  he  actually  paid  a 
thousand  dollars,  society  would  be  justified  in  locking  him  up 
and  in  punishing  the  seller.  Of  course,  when  the  supply  of  an 
article  is  limited  and  the  desire  of  the  individual  such  that  the 
article  possesses  a  peculiar  utility  for  him,  not  shared  by  the 


I  80  Meaning  of  Value  [§  74 

rest  of  the  community,  his  subjective  estimate  may  seriously 
influence  its  value.  This  is  true,  however,  only  for  the  reason 
that  because  of  the  limitation  of  supply  the  subjective  estimate 
of  the  single  individual  forms  so  large  a  part  of  the  collective 
desire.  To  get  my  ancestor's  watch  out  of  pawn,  I  may  pay 
if  necessary  far  more  than  its  value  to  any  one  else.  The 
border  between  an  enthusiastic  collector  and  one  with  a  "screw 
loose"  is  sometimes  a  narrow  one.  Ordinarily,  however,  the 
desire  of  any  one  individual  forms  only  an  insignificant  part 
of  the  collective  desire. 

\^alue,  therefore,  depends  upon  the  fact  not  only  that  each 
individual  measures  the  relative  urgency  of  his  own  various 
wants,  but  that  he  compares  them  consciously  or  unconsciously 
with  those  of  his  neighbors.  I  not  only  measure  the  relative 
satisfaction  that  I  can  get  from  apples  or  nuts,  but  the  quan- 
tity of  apples  I  can  get  for  the  nuts  depends  on  the  relative 
estimate  put  upon  both  by  the  rest  of  society.  If  an  apple  is 
worth  twice  as  much  as  a  nut,  it  is  only  because  the  group  that 
uses  both  apples  and  nuts  finds,  after  comparing  individual 
preferences,  that  the  desire  unsatisfied  by  the  lack  of  an  apple 
is  twice  as  keen  as  that  unsatisfied  by  the  lack  of  a  nut.  Value, 
therefore,  is  not  merely  the  expression  of  marginal  utility;  it 
is  the  expression  of  social  marginal  utility. 

This  serves  to  explain  how  a  thing  which  has  no  direct  utility 
to  the  individual  may  yet  possess  a  value  for  him.  If  by  chance 
I  secure  a  locomotive,  it  is  in  itself  useless  to  me.  If,  how- 
ever, I  can  dispose  of  it  to  a  railroad  company,  it  acquires 
a  value,  because  in  other  hands  it  will  serve  a  social  purpose. 
The  locomotive  now  has  an  indirect  utility  for  me  because 
through  it  I  can  secure  things  of  direct  utility.  Its  indirect  in- 
dividual marginal  utility  to  me  is  the  result  of  its  direct  marginal 
utility  to  the  community,  that  is,  to  that  part  of  the  community 
where  marginal  comparisons  are  made  between  locomotives  and 
other  goods.  Of  all  the  valuable  things  in  existence  only  an 
infinitesimal  fraction  possesses  any  direct  utility  for  any  one 


§  74]  Individual  and  Social  1 8 1 

man;  yet  the  more  of  them  any  one  has,  the  richer  he  is,  pro- 
vided he  can  dispose  of  them  to  others.  Thus,  while  social 
utility  is  made  up  of  a  combination  of  individual  utilities  —  that 
is,  while  a  thing  cannot  be  useful  to  society  unless  it  is  useful 
to  the  individuals  that  compose  society  —  the  indirect  margi- 
nal utility  of  a  thing  to  any  individual  is  the  result  of  its  social 
marginal  utility.  To  a  member  of  society  the  indirect  mar- 
ginal utilities  form  the  chief  element  in  value.  Hence  in 
society  the  individual  marginal  utility  which  controls  value 
may  be  said  to  be  the  reflection  of  social  marginal  utility.  Our 
readiness  to  part  with  nuts  or  apples  will  depend  not  so  much 
on  the  degree  in  which  we  as  isolated  individuals  prize  nuts  as 
compared  with  apples,  but  chiefly  on  the  degree  in  which  other 
people  prize  apples  as  compared  to  nuts.  This  estimate  is  the 
controlling  consideration.  Value  is  a  result  of  the  community 
of  wants. 

The  problem  with  which  we  set  out  in  the  last  section  is 
thus  solved.  There  are,  in  fact,  two  solutions,  —  one  depending 
on  the  distinction  between  total  utility  and  marginal  utility, 
the  other  depending  on  the  distinction  between  individual 
utility  and  social  utility.  As  to  the  first,  iron  in  the  abstract  is 
indeed  more  useful  than  diamond;  but  a  pound  of  iron  does 
not  satisfy  as  many  or  as  urgent  wants  as  a  pound  of  diamonds, 
and  it  is  therefore  not  so  valuable,  even  to  an  isolated  indi- 
vidual. When  we  say  that  iron  is  more  useful  than  diamonds, 
we  refer  to  iron  in  the  abstract.  When  we  say  that  iron  is  less 
valuable  than  diamonds,  we  refer  to  a  definite  quantity.  It  is 
therefore  true  that  a  commodity  may  possess  more  utility  and 
at  the  same  time  less  value  than  another;  but  the  utility  to 
which  we  then  refer  is  not  the  marginal  utility.  The  total 
utility  of  eight  apples  is  greater  than  the  total  utility  of  five, 
but  the  effective  utility  may  be  less.  When  the  Dutch  mo- 
nopolists destroyed  a  portion  of  the  pepper  crop  to  increase 
the  price,  the  total  utility  of  the  supply  fell,  but  the  marginal 
utility,  and  hence  the  effective  utility,  and  the  value  rose. 


I  82  Meaning  of  Value  [§  75 

Al  the  same  time  iL  may  conceivably  happen  IhaL  to  any 
one  individual  a  pound  of  iron  may  in  and  of  itself  be  more 
useful  than  a  pound  of  diamonds.  Yet  this  fact  will  not  con- 
trol value.  P'or  the  indirect  utility  of  iron  is  far  greater  than 
its  direct  utility,  in  precisely  the  same  way  that  the  wants  of 
a  community  are  more  important  than  the  wants  of  any  indi- 
vidual. Even  though  a  pound  of  iron  may  at  a  given  moment 
be  more  directly  useful  to  an  individual,  it  is  always  true  that 
a  pound  of  iron  does  not  satisfy  as  many  or  as  urgent  social 
wants  as  a  pound  of  diamonds.  When  we  speak  of  the  value 
of  iron  or  of  diamonds,  we  refer  to  their  social  utility,  not  to 
their  individual  utility.  Or,  to  put  it  in  another  way,  the  mar- 
ginal utility  of  iron  or  diamonds  to  a  man  living  in  society  is  a 
reflex  of  their  social  utility.  Therefore  iron  is  always  less  valu-' 
able  than  diamonds,  because  the  social  marginal  utility  of  a 
pound  of  iron  is  always  less  than  the  social  marginal  utility  of  a 
pound  of  diamonds.  Value  in  society  is  the  expression  of  social 
marginal  utility.     Social  economics  deals  only  with  this  kind  of 

value. 

75.    Value  in  Exchange 

Since  value  is  a  social  conception  depending  on  a  compari- 
son of  divers  goods,  and  since  this  comparison  is  ordinarily 
made  in  society  by  their  transfer  from  man  to  man,  it  is  clear 
that  the  value  with  which  economics  has  to  deal  is  exchange 
value,  or  value  in  e.xchange.  Speaking  roughly,  we  may  say 
that  the  value  of  anything  is  what  it  will  exchange  for.  Speak- 
ing strictly,  we  mean  that  the  value  of  an  article  may  be  ex- 
pressed in  terms  of  any  other  article  for  which  it  will  exchange. 

Earlier  writers  made  a  distinction  between  value  in  use  and 
value  in  exchange,  but  they  confused  value  in  use  with  total 
or  absolute  utility.  As  soon  as  we  grasp  the  fact  that  the 
utility  with  which  economics  deals  is  marginal  utility,  the  old 
distinction  between  value  in  use  and  value  in  exchange  dis- 
appears. Other  writers  sometimes  use  the  terms  subjective 
and   objective   value  when   referring   to   individual  and  social 


§  75]  Value  in  Exchange  183 

valualion  respectively.  The  terms  are  awkward,  because  they 
obscure  the  fact  that  at  bottom  value  is  not  an  external 
characteristic  of  a  thing,  but  an  expression  of  its  relation  to 
an  individual.  Value  is  the  result  of  an  estimate  of  a  quality, 
not  the  quality  itself.  In  this  sense  there  is  no  objective 
value.  It  can  be  called  objective  only  in  the  sense  that  when 
society  attaches  a  value  to  a  commodity  it  is  something  to 
which  the  individual  or  subjective  valuation  must  conform  in 
making  an  exchange. 

The  study  of  Robinson  Crusoe  is  important  as  reminding 
us  that  the  foundation  of  value  is  independent  of  exchange. 
Strictly  speaking,  it  is  independent  of  exchange  only  as  be- 
tween man  and  man,  not  as  between  commodity  and  com- 
modity or  between  want  and  want.  Crusoe  exchanges  or 
weighs  off  in  his  mind  apples  and  nuts,  and  thus  gets  an  esti- 
mate for  their  value  to  him.  "Value  in  use"  is  thus  really 
only  one  kind  of  "value  in  exchange,"  although  it  is  a  pe- 
culiar kind  of  exchange.  As  soon,  however,  as  we  deal  not 
with  Crusoe,  but  with  men  in  society,  we  find  that  not  only 
does  the  individual  as  before  measure  one  want  against  an- 
other, but  that  the  satisfaction  of  that  want  depends  upon  the 
estimate  put  by  other  individuals  on  their  respective  wants. 
Value  in  individual  economy  always  presupposes  at  least  two 
things;  value  in  society  presupposes  in  addition  at  least  two 
men.  In  other  words,  value  in  society  —  that  is,  in  actual 
life  —  is  value  in  exchange;  and  this  value  in  exchange  is 
nothing  but  the  expression  of  its  true  value  in  use  to  the  mem- 
bers of  the  social  group,  that  is,  of  its  marginal  utility. 

Strictly  speaking,  the  value  of  a  thing  exists  only  at  the 
moment  when  it  is  exchanged  for  or  compared  to  something 
else,  just  as  the  utility  of  a  thing  exists  only  at  the  moment 
when  it  satisfies,  or  is  conceived  of  as  satisfying,  a  want.  Since, 
however,  men  learn  by  experience  to  attribute  utility  to  things 
which  can  gratify  a  want,  so  they  attribute  value  to  things 
which  they  know  can  be  exchanged  for  other  things.     Thus 


1  84  Meaning  of  Value  [§  76 

value  comes  to  mean  exchange  power,  or  the  estimate  of  ex- 
change power. 

It  is  accordingly  plain  that  when  we  define  the  value  of  a 
thing  as  the  expression  of  its  social  marginal  utility,  we  mean 
that  value  is  an  expression  of  its  exchange  power;  for  ex- 
change power  is  based  on  the  comparative  estimate  of  direct 
social  utility,  which  gives  to  every  owner  of  the  commodity  the 
indirect  individual  utility  that  fixes  value  in  society.  As  we 
can  estimate  this  exchange  power  only  by  comparing  one  thing 
with  another,  value  is  sometimes,  but  less  accurately,  spoken 
of  as  a  ratio,  or  a  ratio  of  exchange.  Value  is  indeed  relative, 
but  it  is  not  a  relation  or  a  ratio;  it  is  an  expression  of  our 
estimate  of  the  relative  exchange  power  of  anything. 

76.  Value  aud  Price 

Since  value  is  an  expression  of  our  estimate  of  relative  ex- 
change or  purchasing  power,  the  value  of  anything  can  be 
ascertained  only  by  comparing  it  with  other  things.  When  we 
measure  a  commodity  in  terms  of  some  one  other  commodity, 
we  speak  of  price.  If  the  value  of  a  cow  is  equal  to  that  of 
five  sheep,  we  say  that  the  price  of  a  cow  is  five  sheep.  In 
civilized  society  we  have  become  accustomed  to  measure  all 
values  in  terms  of  a  single  commodity  called  money;  so  that 
by  price  we  now  mean  the  money  value  of  anything,  —  the 
amount  of  money  for  which  it  will  exchange. 

Value  and  price  have  thus  come  to  be  interchangeable  terms. 
Sometimes,  however,  value  is  used  in  a  special  sense.  Thus 
we  speak  of  a  thing  as  selling  for  less  than  its  real  value,  or  of 
a  shopkeeper  charging  more  than  it  is  worth,  when  we  mean 
that  the  price  to  others  in  the  long  run  will  be  higher  or  lower. 
So  the  department  stores  advertise  "great  values"  when  they 
mean  that  the  goods  are  sold  at  exceptionally  low  prices  com- 
pared to  the  seller's  estimate  of  their  utility  to  the  pubHc. 
Ordinarily,  however,  when  we  say  a  thing  is  worth  five  cents, 
we  mean  that  the  price  is  five  cents. 


§  77]  Increments  of  Wealth  185 

While  the  value  of  anything  is  thus  virtually  equivalent  to 
its  price,  we  must  not  confuse  values  in  general  with  prices  in 
general.  When  we  conceive  of  a  single  commodity,  like  money, 
as  a  standard,  we  consider  it  as  a  fixed  point,  not  subject  to 
fluctuation.^  Prices  hence  may  rise  or  fall  with  reference  to 
this  standard.  But  we  cannot  speak  of  a  general  rise  or  fall 
in  values,  because  there  is  no  fixed  point.  Cows  may  rise  in 
value  as  compared  with  sheep,  but  sheep  themselves  may  fall 
as  compared  with  poultry,  and  poultry  may  vary  as  compared 
with  something  else.  Value  expresses  a  relation;  hence,  if  the 
value  of  some  articles  diminishes,  it  means  that  the  value  of 
others  must  increase.  But  if  the  price  of  certain  articles  falls, 
it  does  not  follow  that  the  price  of  other  articles  will  rise.  There 
may  be  a  general  rise  or  fall  of  prices,  because  we  measure 
prices  in  one  commodity,  money;  there  cannot  be  a  general 
rise  or  fall  of  values,  because  money  also  has  a  value.^ 

77.   Value  and  Marginal  Increments  of  Wealth 

We  have  thus  far  spoken  of  value  as  the  expression  of  social 
marginal  utility.  To  be  more  exact,  it  should  be  stated  that 
marginal  utility  (and  hence  value)  depends  not  upon  the  com- 
modity as  a  whole,  but  upon  the  marginal  increments  of  wealth 
in  the  commodity.  This  might  be  called  Clark's  law,  from 
its  first  formulator.  Professor  John  B.  Clark. 

To  prepare  the  way  for  grasping  this  principle,  we  must  call 
attention  to  several  points.  In  the  first  place,  the  rapidity 
with  which  the  utility  of  successive  increments  of  a  commodity 
diminishes  depends  largely  on  its  combination  with  others. 
One  scarf-pin  is  all  a  man  needs,  the  utility  of  a  second  would 
be  doubtful,  a  tenth  would  be  useless.  But  with  many  cravats, 
we  can  use  more  scarf-pins.     Put  before  the  same  man  a  finely 

'  As  to  the  difficulties  that  arise  from  fluctuations  in  the  money  stan- 
dard, see  below,  §  197. 

*When  Wall  Street  speaks  of  a  "  general  slump  of  values,"  it  means 
only  a  fall  in  the  prices  of  securities  traded  in  on  the  stock  exchange. 


1 86  •       Meaning  of  Value  [§77 

cooked  dinner  or  a  loaf  of  bread,  and  not  only  will  he  enjoy 
the  first  more,  but  he  will  be  willing  to  pay  a  higher  price  for 
the  bread  as  a  part  of  the  dinner. 

Secondly,  in  all  commodities  except  the  simplest  of  a  class 
there  is  always  to  be  found  a  combination  of  various  utilities. 
A  plain  deal  table  suffices  to  hold  books;  one  of  polished  rose- 
wood satisfies  a  more  refined  want  and  possesses  an  additional 
utility.  I  may  have  an  ample  supply  of  boots,  yet  a  new  pair 
with  golf  rubbers  in  the  sole  may  be  desired  for  that  reason 
alone.  Each  new  utility  in  an  object  practically  makes  it  a 
new  object.  All  commodities  are  virtually  made  up  of  such 
combinations  or  bundles  of  utilities. 

Thirdly,  the  marginal  increment  of  a  man's  wealth  is  made 
up  of  varying  proportions  of  such  separate  utilities.  Every 
one  purchases  first  necessaries,  then  comforts,  then  luxuries. 
But  what  is  luxury  to  one  man  may  be  almost  necessity  to 
another.  What  is  bought  with  one's  last  dollar  is  the  marginal 
increment  of  enjoyment;  but  the  more  dollars  we  have,  the 
less  the  utility  of  each.  To  a  man  with  a  very  small  income 
the  final  dollar  may  afford  the  luxury  of  a  few  pints  of  beer; 
to  the  rich  man  the  dollar  spent  in  beer  is  not  marginal.  His 
marginal  increment  of  wealth  may  take  the  form  of  luxuries 
like  champagne  or  pictures,  but  they  will  generally  consist  of 
particular  attributes  of  commodities.  It  may  be  the  fashion- 
able cut  of  his  garments,  the  last  touch  given  to  the  delicious 
dinner  by  a  cordon  bleu,  the  sumptuousness  of  his  books,  the 
elegance  of  his  carriage,  the  artistic  quality  of  his  china  or  silver- 
ware. The  garments,  the  dinner,  the  books,  the  carriage,  the 
china, — ^  each  possesses  various  kinds  of  utihty;  but  what 
makes  the  particular  objects  desirable  to  him  is  not  the  pri- 
mary, elementary  utility  in  each,  but  the  final  marginal  utility. 

Fourthly,  since  each  of  the  separate  utilities  of  an  article 
becomes  at  a  certain  point  marginal  to  different  classes  of  men, 
its  value  depends  not  upon  its  marginal  utility  as  a  whole, 
but   upon   that   of   the   increments   of   utihty   each   estimated 


§77]  Increments  of  Wealth  187 

separately.  If  value  were  the  measure  of  marginal  utility  as  a 
whole,  all  but  the  simplest  commodities  would  be  worth  far 
more  than  they  are.  Take,  for  instance,  a  fine  automobile. 
There  are  at  least  five  different  qualities  which  give  it  a  value. 
These  are,  in  the  order  of  importance,  (i)  power  to  afford 
locomotion;  an  old  two-wheeled  cart  would  do  as  well:  (2) 
freedom  from  jolting  and  protection  from  sun  and  rain;  a  top- 
buggy  would  do  this:  (3)  size;  a  plain  coach  would  possess 
this:  (4)  elegance  of  finish;  a  fine  equipage  would  have  this: 
(5)  speed  and  exhilaration;  only  a  motor  car  will  give  that. 
In  such  a  vehicle  there  would  be,  so  to  speak,  at  the  same  time 
a  cart,  a  buggy,  a  coach,  an  equipage,  a  self-propeller.  The  most 
important  or  primary  utility  is  the  power  to  afford  locomotion. 
Without  this  it  would  be  of  no  use  at  all.  The  next  quality  in 
importance  is  comfort;  if  it  has  no  springs,  the  vehicle  will  not 
be  used  for  pleasure  driving.  And  so  on  with  the  other  quali- 
ties; each  has  a  diminishing  importance.  Yet  the  value  of 
the  vehicle  is  not  the  reflex  of  its  marginal  utility  as  a  whole. 
For  the  primary  quality  of  locomotion  alone  the  rich  man 
would,  if  necessary,  pay  an  immense  sum.  The  mere  fact  of 
riding,  which  might  be  a  luxury  to  a  poor  man,  may  be  a  neces- 
sity to  him.  The  second  utility  —  comfort  ^ — -would  be  less 
important  than  the  first,  but  might  still  be  prized  immeasur- 
ably by  him.  And  so  on  with  the  other  qualities.  So  that,  if 
need  be,  he  would  pay  a  fabulous  amount  for  the  vehicle. 

As  a  matter  of  fact,  however,  what  he  values  in  the  partic- 
ular automobile  is  the  fifth  or  final  utility,  that  of  self-pro- 
pulsion. He  probably  has  buggies,  coaches  and  equipages 
galore.  The  fourth,  third  and  preceding  utilities  represent 
less  value  because  each  utility  is  marginal  in  turn  to  a  class 
of  smaller  spending  power.  If  automobiles  rose  in  price,  there 
would  be  fewer  of  them,  but  more  equipages,  because  the 
particular  quality  which  differentiates  an  equipage  from  an 
ordinary  coach  would  be  a  marginal  utility  within  the  reach  of 
a   larger   but    less   wealthy    class.     If    equipages   advanced    in 


1 88  Meaning  of  Value  [§77 

price,  more  plain  coaches  would  be  built;  if  the  price  of  coaches 
rose,  more  buggies  would  be  built.  In  each  case  the  vehicle 
is  desired  by  a  particular  class  for  a  new  utility,  which  is  to  that 
class  marginal.  Each  successive  class,  however,  is  poorer  than 
its  predecessor,  and  the  gradations  themselves  become  less. 
There  is  more  divergence  between  a  multi-millionaire  and  a 
man  of  moderate  wealth  than  between  the  latter  and  a  man  of 
simply  comfortable  means.  Thus  there  will  be  a  greater  dif- 
ference in  price  between  automobiles  and  equipages  than  be- 
tween these  and  coaches,  more  between  a  coach  and  a  buggy 
than  between  a  buggy  and  a  cart.  In  each  case  the  special 
utility  for  which  the  vehicle  is  bought  is  a  marginal  utility  to 
a  poorer  class.  When  a  rich  man  buys  an  automobile,  he  does 
not  pay  the  immense  sum  which  he  would,  if  necessary,  give 
for  the  mere  privilege  of  locomotion.  He  pays  the  small  price 
which  a  poor  man  would  pay  for  a  cart,  plus  the  somewhat 
larger  addition  that  a  slightly  less  poor  man  would  pay  for  the 
difference  between  a  cart  and  a  buggy  (comfort),  plus  the  still 
greater  increment  that  a  man  of  moderate  means  would  pay 
for  the  difference  between  a  buggy  and  a  coach  (size),  plus  the 
yet  larger  increment  that  a  fairly  wealthy  man  would  pay  for 
the  difference  between  a  coach  and  an  equipage  (elegance),  plus 
the  final  and  largest  increment  that  he  and  his  class  are  willing 
to  give  for  the  marginal  utility  to  them  of  the  automatic  attach- 
ment. All  these  increments  added  together  are  far  less  than 
what  he  would,  if  necessary,  pay  for  the  privilege  of  locomo- 
tion, —  the  cart  element  in  the  automobile. 

When,  therefore,  we  say  that  value  or  purchasing  power  is 
the  expression  of  social  marginal  utility,  it  is  clear  that  what 
we  mean  is  that  value  is  the  expression  of  the  social  marginal 
increments  of  utility  which  are  bundled  together  or  united  in 
anything,  and  each  of  which  is  marginal  to  a  different  class. 


CHAPTER  XIII 
THE  MEASURE  OF  VALUE 

78.  References 

W.  Smart,  Introduction  to  the  Theory  of  Value  (1891),  chs.  Lx-xiv;  J.  B. 
Clark,  Philosophy  of  Wealth  (1886),  ch.  xxiv;  A.  JNIarshall,  Principles 
(1910),  bk.  V,  ch.  xiv;  N.  G.  Pierson,  Principles  (1902),  part  i,  ch.  i, 
§  4;  W.  S.  Jevons,  Theory  (1911),  ch.  iv;  E.  v.  Bohm-Bawerk,  Po^/ZzVe 
Theory  of  Capital  (1891),  bk.  iii,  ch.  x;  F.  v.  Wieser,  Natural  Value 
(1903),  bk.  v;  A.  W.  Flux,  Economic  Principles  (1904),  ch.  iv;  C.  M. 
Walsh,  Measurement  of  Exchange  Value  (1901),  ch.  i;  J.  A.  Hobson, 
Economics  of  Distribution  (1900),  ch.  ii;  H.  J.  Davenport,  The  Economics 
of  F^nter prise  (1913),  ch.  vi-viii;  D.  I.  Green,  Pain  Cost  and  Opportunity 
Cost  (Quart.  Jour.  Econ.,  VIII,  1895);  A.  C.  Whitaker,  History  and  Crit- 
icism of  the  Labor  Theory  of  Value  in  English  Political  Economy  (Co- 
lumbia Studies,  XIX,  1904);  J.  B.  Clark,  Essentials  of  Economic  Theory 
(1907),  chs.  iii  and  vi. 

79.   Meaning  of  Cost 

Value,  as  we  have  seen,  has  a  meaning  only  when  attached 
to  a  definite  quantity  of  an  article.  The  value  of  iron  means 
nothing;  the  value  of  a  ton  of  iron  means  something.  In 
order  to  ascertain  why  anything  has  value,  we  must  therefore 
inquire  not  only  why  we  attach  any  importance  to  it  as  com- 
pared with  other  things  in  general,  but  also  why  a  definite 
quantity  of  that  article  satisfies  more  or  less  of  our  wants  than 
an  equal  quantity  of  something  else.  We  must  regard  not 
only  our  desire  in  the  abstract,  but  our  desire  for  a  particu- 
lar amount.  That  is,  in  analyzing  value  we  must  take  into 
consideration  not  only  the  demand,  but  the  supply;  for  the 
effective  demand  for  an  article  which  lies  at  the  root  of 
value  is  itself  influenced  by  the  supply.  Of  two  equally  useful 
articles  we  shall  be  more  concerned  in  securing  the  one  the 

189 


1 90  Measure  of  Value  [§  70 

supply  of  which  is  limited  than  ihc  one  ihc  supply  of  which  is 
abundant. 

What  regulates  supply?  In  the  last  resort  it  is  the  forces  of 
nature  as  utilized  by  the  energy  of  man.  In  some  cases  nature 
gives  so  abundantly  that  man  need  do  nothing;  in  other 
cases  nature  is  so  niggardly  that  his  utmost  effort  fails  to 
augment  the  scanty  stock.  Between  these  two  extremes  lie 
the  great  mass  of  commodities  the  supply  of  which  can  be 
increased  through  human  action.  The  more  readily  nature 
discloses  her  secrets  to  man,  the  less  is  the  difficulty  of  secur- 
ing a  supply.  The  greater  the  stubbornness  of  nature,  the  more 
determined  do  our  efforts  become.  It  is  in  this  sense  that 
value  may  be  considered  to  be  the  measure  of  the  difficulty  of 
attainment,  —  that  is,  of  the  cost  involved  in  securing  a  supply. 
Value,  then,  would  be  the  expression  of  costliness. 

What,  more  precisely,  is  cost?  The  word  is  used  in  a 
variety  of  senses.  To  the  consumer  cost  means  price;  if  a  thing 
costs  a  dollar,  he  means  that  the  price  is  a  dollar.  To  the 
employer  cost  means  total  cash  outlay  expended  in  production. 
Here  the  cost  usually  is  less  than  the  price,  the  difference 
between  cost  and  price  being  the  profit :  a  machine  may  cost 
the  builder  ten  dollars;  he  may  sell  it  for  twelve.  To  the 
workman  cost  means  irksomeness  of  labor;  the  harder  the 
work,  the  more  does  his  labor  "cost"  him.  Underlying  all 
these  meanings  is  the  idea  of  sacrifice,  the  giving  up  of  some- 
thing in  return  for  the  object  to  be  attained.  All  sacrifice 
involves  a  pain,  —  a  pain  of  doing  something  distasteful  or 
of  refraining  from  doing  something  pleasurable.  The  one  is 
present  physical  sacrifice,  the  other  present  mental  sacrifice 
depending  upon  a  future  physical  sacrifice. 

Just  as  the  word  utility  brings  to  our  mind  the  pleasure 
we  get  from  a  thing,  so  the  term  disutility  is  used  to  signify 
its  ability  to  inflict  pain.  We  know  that  the  marginal  utility 
of  a  commodity  diminishes  with  the  increase  of  the  amount 
at  our  disposal,  and  under  certain  conditions  shrinks  to  zero. 


§  79]  Meaning  of  Cost  191 

We  have  so  much  of  it  that  it  becomes  indifferent  to  us.  It 
possesses  what  Jevons  calls  "inutility,"  that  is,  no  (marginal) 
utility.  Its  value,  as  in  the  ordinary  case  of  air  and  water,  is 
nothing.  Under  other  conditions  of  supply  a  commodity  which 
usually  possesses  utility  may  actually  inflict  a  pain.^  Wood  ordi- 
narily satisfies  a  want ;  but  when  the  prospective  farmer  tries  to 
make  a  clearing,  the  wood  is  something  to  be  got  rid  of.  Its 
presence  is  a  discomfort.  It  possesses  not  a  positive,  but  a 
negative,  utility.  It  has  gone  through  the  stages  of  utility  and 
inutility,  and  has  reached  that  of  disutility.  Instead  of  being 
a  commodity  it  might  now  be  called  a  "discommodity."  So, 
in  the  same  way,  water  in  parts  of  England  is  something  to 
be  removed  by  draining  the  fens;  water  in  arid  America  is 
so  necessary  for  irrigation  purposes  that  it  attains  a  high 
value. 

Not  only  things  external  to  a  man  run  through  this  scale 
from  utility  to  disutility.  Physical  activity  itself  is  subject  to 
the  same  law.  When  a  man  begins  to  work,  the  exercise  of 
his  muscles  is  a  pleasure.  A  certain  amount  of  it  is  even  a 
necessity.  With  the  increase  in  the  amount  beyond  a  certain 
point,  the  pleasure  diminishes,  until  further  activity  becomes  a 
matter  of  indifference.  A  still  further  increase  means  dis- 
comfort, until,  finally,  any  more  work  involves  positive  agony. 
Labor  or  toil,  therefore,  means  painful  exertion.  But  just  as 
the  same  commodity  may,  according  to  circumstances,  possess 
utility  or  disutility,  so  the  same  activity  may  or  may  not  in- 
volve toil.  Singing  is  generally  a  pleasure;  to  the  chorus  girl 
it  is  toil.  Golf  playing  is  a  diversion;  to  the  golf  teacher  it  is 
labor. 

Cost,  therefore,  is  at  bottom  equivalent  to  pain.  W'e  un- 
dergo pain  in  order  to  secure  utility  or  to  remove  disutility. 
Cost  is  always  the  antithesis  of  remuneration.  We  give  up 
something  in  order  to  get  something  in  return.     The  ordinary 

'  Some  commodities  which  seem  to  give  us  pain  really  afford  a  surplus 
of  pleasure.     A  distasteful  medicine  is  none  the  less  prized  by  us. 


192  Measure  of  Value  [§80 

man  tries  to  secure  the  greatest  result  with  the  least  effort. 
He  will  toil  only  up  to  that  point  where  the  cost,  or  pain, 
begins  to  exceed  the  pleasure  of  what  he  gets  in  return. 
There  are  grades  in  disutility  or  pain,  just  as  there  are  grades 
in  utility  or  pleasure.  As  the  marginal  utility  of  a  commodity 
depends  on  the  supply,  so  the  marginal  disutility  or  pain  of 
labor  depends  on  the  amount.  The  more  fish  I  have,  the  less 
the  utility  of  each;  the  more  hours  I  must  work  to  catch  them, 
the  greater  the  disutility  of  each  hour's  work.  Up  to  a  certain 
point  the  pain  of  the  work  does  not  equal  or  exceed  the 
pleasure  I  get  from  the  fish.  Beyond  that  point  I  shall  not 
work,  because  the  result  will  be  a  surplus  of  pain.  At  that 
marginal  point  the  utility  of  the  fish  equals  the  pain  or  cost  of 
the  labor.  There  will  be  a  balance  between  the  pleasure  and 
the  pain;  or,  in  other  words,  the  pleasure  and  the  pain  will  be 
in  equilibrium.  In  the  case  of  the  individual  economy  —  that 
is,  of  man  living  apart  from  society  —  the  marginal  degrees  of 
utility  and  of  pain,  or  cost,  therefore  tend  to  be  equal. 
Marginal  cost  equals  marginal  utility.  The  value  of  the  fish 
may  be  estimated  in  either  the  one  or  the  other. 

80.  Individual  and  Social  Cost 

In  dealing  with  the  problems  of  actual  life,  however,  we 
treat  not  of  a  Crusoe  living  on  fish,  but  of  men  living  in  soci- 
ety and  making  exchanges  with  each  other.  The  individual 
economy  is  profoundly  modified  by  the  social  economy.  This 
is  the  point  that  has  often  been  overlooked.  Our  study  is 
social  economics. 

We  have  seen  that  the  marginal  utility  to  an  individual  is, 
in  effect,  a  reflex  of  the  social  marginal  utility.  In  the  same 
way  the  marginal  "disutihty"  to  an  individual  may  be  con- 
verted through  social  causes  into  a  utility.  What  gives  one 
man  pleasure  may  give  another  pain.  I  may  enjoy  a  horse;  but 
if  you  do  not  ride  or  drive,  the  horse  will  put  you  to  the  use- 
less  expense   of   keeping   him.       Yet,  since   there   is   a   social 


§  8o]  Individual  and  Social  Cost  193 

demand  for  horses,  you  can  get  rid  of  him  to  advantage;  and 
you  will  therefore  not  give  him  away,  but  keep  him  until  you 
can  sell  him  with  profit.  Although  the  horse  had  a  positive 
disutility  for  you,  he  now  acquires  an  indirect  utility  because 
of  social  reasons.  So  if  the  farmer,  mentioned  above,  who 
wanted  to  make  a  clearing,  lived  by  chance  near  a  large  com- 
munity, he  would  not  burn  the  wood,  but  sell  it,  because  it 
would  now  have  a  social  utility.  Its  disutility  to  him  would  be 
converted  into  a  utility.  It  is  only  when  anything  produces 
a  surplus  of  pain  to  the  community  as  a  whole  —  as  a  plague 
of  grasshoppers,  or  an  inundation,  or  the  sewage  of  a  city 
of  which  there  is  no  intelligent  disposition  —  that  it  possesses 
social  disutility.  In  such  a  case  it  can  have  no  indirect  utility 
for  the  individual. 

Not  only  may  cost  thus  change  into  utility,  but  the  real  cost 
of  importance  in  affecting  value  is  social  cost,  not  individual 
cost.  We  stated  above  that  value  is  the  measure  of  sacrifice. 
In  what  sense,  however,  is  value  the  measure  of  sacrifice? 
Evidently,  not  of  individual  sacrifice.  A  street-sweeper  may 
work  harder  than  a  skilled  factory  hand,  and  yet  the  value  of 
his  services  will  be  less.  Value  is  a  social  conception;  society 
puts  its  appraisal  upon  commodities.  •  If  value  is  a  measure  of 
sacrifice  and  if  value  is  a  social  estimate,  value  must  be  the 
measure  of  social  sacrifice  or  cost.  Social  sacrifice  means  the 
sacrifice  which  members  of  society  as  a  whole  are  willing  to 
make.  The  exertion  of  one  man  is  estimated  in  relation  to 
the  exertion  of  another,  and  the  sacrifice  of  each  is  compared 
with  the  need  of  society  as  a  whole.  The  standard  is  social, 
not  individual.  It  is  far  easier  to  be  a  street-sweeper  than  a 
skilled  factory  hand.  Society  is  more  willing  to  spare  the 
former  than  the  latter;  for,  to  replace  the  one,  society  must 
give  up  more  of  its  energy  than  to  replace  the  other.  Con- 
sequently, although  the  street-sweeper  may  work  the  harder, 
the  sacrifice  or  cost  to  society  is  less  than  in  the  case  of  the 
factory  hand.  The  latter  saves  society  more  effort.  When 
13 


1 94  Measure  of  Value  [§  8i 

one  commodity  is  exchanged  for  another,  or  when  both  cost 
the  same,  it  means  that  the  additional  sacrifice  that  would  be 
imposed  upon  society  to  replace  either  of  them  is  the  same. 
The  marginal  social  cost  is  identical. 

81.    Cost  and  Surplus 

Since  economic  activity  consists  in  securing  as  much  enjoy- 
ment as  possible  with  the  least  effort  or  cost,  it  follows  that 
under  conditions  of  progress  the  individual  will  endeavor  to 
secure  a  surplus  utility.  If  game  is  plentiful  in  one  section 
and  so  scarce  in«  another  that  the  hunter  must  work  to  the 
point  of  exhaustion,  his  needs  will  be  satisfied  by  far  less  ex- 
ertion in  the  first  case  than  in  the  second.  The  extra  utility 
which  he  enjoys  is  called  residual  utility,  or  surplus  utility,  or,  in 
short,  surplus.  Looked  at  from  the  point  of  view  of  produc- 
tion, it  is  a  producer's  surplus:  the  labor  of  hunting  is  the 
cost  of  securing  or  producing  the  game.  From  the  point  of 
view  of  consumption,  it  is  a  consumer's  surplus:  the  pleasure 
of  eating  the  game  is  its  utility.  The  excess  of  the  utility 
over  the  cost  is  the  surplus.  Whether  we  call  it  consumer's 
surplus  or  producer's  surplus  is  immaterial. 

The  conception  of  surplus,  however,  is  sometimes  used  in  a 
second  way.  In  the  case  of  the  surplus  just  referred  to  we 
compare  enjoyment  with  exertions,  and  we  call  it  either  pro- 
ducer's or  consumer's  surplus  according  as  we  look  at  it  from 
the  point  of  view  of  cost  or  of  enjoyment.  This  conception 
of  surplus  is  universal:  it  applies  to  every  man  who  is  at  once 
a  producer  and  a  consumer,  to  the  man  living  in  society  as 
well  as  to  the  solitary  huntsman.  The  term  "surplus"  may, 
however,  be  used  in  another  sense,  which  leaves  out  of  account 
the  idea  of  exertion,  and  which  regards  every  man  only  as  a 
consumer.  It  assumes  that  there  has  been  no  cost  of  acquir- 
ing the  articles,  or  that  the  subjective  cost  or  toil  of  ac- 
quisition is  precisely  the  same  to  all.  Here  the  surplus 
satisfaction  that  an  individual  secures  is  entirely  a  consumer's 


§  Si]  Cost  and  Surplus  195 

surplus,'  depending  on  the  relative  urgency  of  his  different 
wants.  If  I  agree  to  give  up  a  book  for  my  neighbor's  knife, 
I  do  so  because  I  expect  his  knife  to  afford  me  more  satisfac- 
tion than  my  book.  The  utility  to  me  of  the  knife  is  greater 
than  the  pain  of  parting  with  the  book.  As  a  consumer,  I 
consider  the  pain  of  parting  with  the  book  as  the  exact  equiva- 
lent of  the  utility  I  lose;  but  since  the  utility  to  be  afforded 
to  me  by  the  knife  is  greater  than  the  utility  I  lose  through  the 
book,  there  will  be  a  balance  to  my  credit.  As  a  consumer,  I 
expect  a  surplus  enjoyment. 

This  specific  consumer's  surplus,  however,  is  of  no  prac- 
tical significance.  For  in  actual  life  we  cannot  enjoy  anything 
without  procuring  it,  —  that  is,  without  its  costing  us  something. 
But  just  as  enjoyments  or  utilities  differ  from  individual  to 
individual,  so  do  costs  or  sacrifices  differ.  Both  the  knives 
and  the  books  can  be  obtained  only  on  the  condition  of  some 
exertion.  The  cost,  or  pain,  of  parting  with  the  book  depends 
on  the  cost,  or  pain,  of  acquiring  the  knife.  Hence  the  only 
real  surplus  which  is  of  importance  is  the  surplus  of  enjoyment 
over  cost,  whether  we  call  it  producer's  surplus  or  consumer's 
surplus.  If  we  take  the  possession  of  knives  or  books  for 
granted,  we  can  indeed  speak  of  consumer's  surplus;  but  if 
we  reflect  that  knives  and  books  must  be  procured  before  they 
can  be  parted  with,  the  surplus  becomes  a  real  surplus,  which 
can  equally  well  be  called  a  producer's  surplus.  It  is  a  sur- 
plus of  utility  over  cost. 

Individual  surplus,  however,  is  essentially  subjective,  and 
never  affects  prices.  For  value  is  a  social  conception.  This 
statement  is  true  of  surplus  in  general,  as  well  as  of  the  abstract 
consumer's  surplus  just  referred  to.  I  secured  a  surplus  utility 
from  my  comrade's  knife,  but  he  secures  a  surplus  utility  from 
my  book.  He  would  otherwise  not  have  given  up  the  knife. 
The  exchange  is  therefore  mutually  beneficial.     The  old  belief 

1  The  term  "  consumer's  rent,"  first  suggested  by  Marshall,  is  not  so 
good  because  of  the  equivocal  meaning  of  "  rent." 


196  Measure  of  Value  [§  f.i 

that  what  one  man  (or  one  country)  gains  in  an  exchanj^' 
another  necessarily  loses,  is  incorrect.  Each  may  get  a  surplu 
utility.  But  while  there  is  a  surplus  utility  to  each,  the  vaku 
does  not  necessarily  change.  The  value  of  the  book  and  the 
value  of  the  knife  remain  the  same.  The  marginal  utility  of  one- 
book  would  still  be  equal  to  that  of  one  knife.  If  for  some  reason 
the  book-owners  found  that  knives  were  twice  as  useful  to  them 
as  before,  and  if  for  a  similar  reason  the  knife-owners  thought 
that  books  were  twice  as  useful  to  them  as  before,  the  surplus 
utility  of  the  exchange  to  each  owner  would  be  double  what  it 
was  before;  but  the  book  would  still  exchange  for  the  knife: 
their  value  would  be  unaltered.  Value  may  thus  remain  the 
same,  even  when  the  benefits  of  exchange  to  both  parties 
grow.  The  more  varied  the  wants  of  a  community,  the  greater 
the  benefits  of  exchange. 

On  the  other  hand,  values  may  change  and  the  surplu > 
utility  remain  the  same.  If  the  book-owners  prized  knive^ 
twice  as  much  as  before,  while  the  importance  of  books  to 
knife-owners  was  unaltered,  this  very  fact  would  increase  the 
aggregate  social  demand  for  knives,  and  therefore  the  sacrifice 
that  the  book-owners  must  make  to  get  a  knife.  The  knife- 
owners  would  make  the  book-owners  give  two  books  for  a 
knife.  The  price  of  books  would  fall,  and  that  of  knives  rise. 
The  marginal  utility  of  one  knife  would  equal  the  marginal 
utility  of  two  books.  The  surplus  utility  to  the  book-owners 
would  remain  the  same,  because,  although  the  utility  would  | 
increase,  the  cost  would  increase  in  the  same  proportion.  In  I 
every  exchange  the  cost,  or  sacrifice,  depends  on  the  reciprocal 
demand  for  the  commodities. 

The  surplus  utility  that  any  one  individual  gets  from  an  eco-   < 
nomic  action,   therefore,   has   no  influence  on  value,   however   I 
much  it  may  affect  his  own  happiness.     It  ^s  a  result,  not  a 
cause.     Surplus  is  the  excess  of  total  utility  over  total  cost. 
Value  is  an  expression  of  marginal  utility  or  marginal   cost. 
Surplus  in  the  case  of  any  one  person  is  the  result  of  an  indi- 


§  8i]  Cost  and  Surplus  197 

vidual  subjective  estimate  which  differs  from  man  to  man; 
value  is  the  result  of  a  social  estimate  in  which  the  individual 
preferences  lose  their  significance. 

We  must  therefore  be  careful  to  interpret  correctly  the 
statement  above,  that  marginal  utility  equals  marginal  disutil- 
ity, or  cost.  In  an  isolated  economy,  where  there  is  only 
one  person  battling  with  nature,  this  tends  to  be  true  of  the 
individual.  In  society,  on  the  other  hand,  whatever  the  rate  of 
exchange,  it  is  only  the  social  utility  and  social  cost  of  which 
the  marginal  degrees  are  equal.  If  the  knife  exchanges  for  a 
book,  it  is  because  the  demand  in  the  community  as  a  whole 
is  such  that  the  marginal  sacrifice  to  a  social  group  in  parting 
with  a  book  tends  to  equal  its  marginal  pleasure  in  getting 
a  knife.  To  put  it  more  accurately,  a  knife  will  exchange  for 
a  book  only  because  the  sacrifice  to  society  in  making  the 
knife,  for  which  it  receives  in  turn  the  pleasure  of  books,  tends 
to  equal  the  sacrifice  of  making  the  book,  for  which  it  receives 
in  return  the  pleasure  of  knives.  To  any  individual  the  sacri- 
fice may  be  less  than  the  pleasure,  but  there  will  always  be  a 
marginal  individual  to  whom  pleasure  and  sacrifice  are  equal. 
The  marginal  pleasure  in  the  aggregate  tends  to  equal  the 
marginal  pain  in  the  aggregate.  The  balance  or  equilibrium 
is  between  the  pains  and  the  pleasures  of  the  sum  of  individuals. 
Where  an  exchange  economy  exists,  the  real  equilibrium  is  a 
social  equilibrium. 

This  shows  clearly  that  the  real  cost  to  any  member  of 
society  which  influences  value  is  not  the  subjective  cost  to  him. 
The  sacrifice  imposed  upon  society  to  secure  anything  is,  as 
we  have  seen,  the  exertion  needed  to  replace  it.  To  replace 
an  article,  however,  from  the  social  point  of  view,  is  to  produce 
it.  For,  although  an  individual  may  replace  an  article  by  pur- 
chasing it  from  the  {)ro(iucer,  society  as  a  whole  can  replace 
an  article  only  by  producing  it.  Thus,  when  we  speak  of 
social  cost,  we  really  mean  cost  of  production;  and  when  we 
say  that  value  is  influenced  by  cost,  we  mean  that  value  is  influ- 


198  Measure  of  Value 


enced  by  cost  of  production.  What  may  be  to  the  individual 
a  subjective  cost  becomes,  when  translated  into  terms  of 
society  —  that  is,  of  value  —  an  objective  cost  to  him.  We 
think  no  longer  of  the  sacrifice  imposed  upon  any  one  indi- 
vidual, but  only  of  the  social  sacrifice,  or  cost,  embodied 
in  the  commodity;  or,  rather,  the  sacrifice,  or  cost,  to  th( 
individual  is  the  result  and  reflex  of  the  sacrifice  to  the  com 
munity.  Just  as  we  saw  above  that  the  individual  utility  which 
affects  value  is  the  reflex  of  the  social  utflity,  so  the  individual 
cost  which  affects  value  is,  as  we  shall  see  more  fully  in  a 
moment,  the  reflex  of  the  social  cost.  If  an  individual  desire.^ 
to  sell  a  commodity,  he  will  normally  get  for  it  not  what  ht 
chooses,  but  what  society  as  a  whole  fixes  as  the  proper  figure. 
He  may  personally  be  able  to  raise  a  particular  horse  for  less 
than  a  particular  cow;  but  that  will  not  enable  him  to  sell  a 
cow  for  more  than  the  usual  price  of  a  horse.  His  own  indi- 
vidual estimate  is  of  importance  only  as  affecting  the  aggre- 
gate social  estimate.  Every  individual  gauges  his  economic 
well-being  from  the  point  of  view  of  surplus,  —  of  getting  as 
much  satisfaction  as  possible  above  the  cost;  but  the  cost,  or 
sacrifice,  which  he  must  incur  is  fixed  not  by  himself,  but  by 
society  as  a  whole.  A  farmer  will  not  permanently  raise  cows 
if  his  cost  exceeds  the  social  level  as  reflected  in  the  price. 

82.   Cost  and  Utility 

The  failure  to  realize  that  value  is  a  social  conception  has 
led  to  much  pointless  controversy.  Thus  Ricardo  and  his 
followers  maintain  that  the  value  of  a  commodity  is  fixed  by 
its  cost  of  production;  while  Jevons  and  those  that  agree  with 
him  contend  that  value  is  fixed  by  its  marginal  utility.  Both 
are  right,  but  neither  is  right  in  the  sense  in  which  he  under- 
stood the  terms.  Cost  of  production  is  the  measure  of  value; 
but  it  is  not,  as  Ricardo  thought,  individual  cost.  Marginal 
utility  determines  value;  but  it  is  not,  as  Jevons  thought,  indi- 
vidual utflity.     Both  cost  and  utflity  measure  value,  because, 


§  82j  Cost  and  Utility  1 99 

as  we  have  seen,  marginal  social  cost  is  always  equal  to  mar- 
ginal social  utility.  In  the  way  they  frame  the  statement,  the 
followers  of  both  Ricardo  and  Jevons  are  correct  in  denying 
the  other's  statement,  and  yet  err  in  their  own.  Rightly  inter- 
preted, they  are  correct, in  their  own  statement,  and  yet  err 
in  denying  the  truth  of  the  others'.     Let  us  make  this  clear. 

Utility,  as  we  know,  is  the  fundamental  quality  of  everything 
used  by  man.  But  utility  is  not  sufhcient  to  give  value.  For 
anything  to  have  value  its  supply  must  be  limited.  The  utility 
which  gives  it  value  is  the  marginal  utility.  If  the  supply  is 
unlimited,  the  marginal  utility  is  zero.  Positive  marginal  utility, 
therefore,  depends  upon  limitation  of  supply.  But  if  the  sup- 
ply is  limited,  it  will  cost  some  sacrifice  to  secure  or  to  repro- 
duce it.  Therefore,  when  we  measure  the  marginal  utility  of  a 
commodity,  we  measure  the  cost  of  securing  it.  Hence  either 
utility  or  cost  may  be  declared  the  measure  of  value.  Thus, 
while  marginal  utility  is  the  fundamental  cause  of  value  in  the 
sense  that  nothing  could  have  any  value  if  it  had  no  utility, 
cost  may  be  declared  to  be  not  indeed  the  cause,  but  an 
equally  good  measure,  of  value.  Regarded  from  this  point  of 
view,  the  discussion  as  to  which  is  the  real  measure  of  value  is 
as  futile  as  to  ask  how  to  measure  the  sound  or  quality  of  a 
hammer's  blow  on  a  bell.  Without  that  particular  kind  of  bell 
there  would  be  a  different  quality  of  sound;  without  that  par- 
ticular kind  of  hammer  there  would  likewise  be  a  different 
quality  of  sound.  So  in  economic  life  we  deal  with  the  de- 
mand for  anything  as  compared  with  its  supply.  When  we 
speak  of  utility,  we  think  of  the  person  who  wants  it,  —  that  is, 
of  the  demand.  When  we  speak  of  cost,  we  think  of  the  per- 
son who  parts  with  it,  —  that  is,  of  the  supply.  But  these 
interact  mutually;  for  the  demand,  although  reflecting  the 
utility,  would  change  if  the  cost  were  different;  and  the  supply, 
although  conditioned  by  the  cost,  would  change  if  the  utility 
were  altered.  To  allirni  that  either  utility  or  cost  exclusively 
measures  value  is  as  incomplete  as  to  say  thai   cither  demand 


200  Measure  of  Value  [§  82 

or  supply  exclusively  fixes  value.  Value  is  the  expression  of 
the  relation  between  demand  and  supply.  We  cannot  speak 
of  marginal  utility  without  implying  cost;  we  cannot  speak  of 
marginal  cost  without  implying  utility. 

All  this  is  true,  however,  as  we  have  seen,  only  of  social 
cost  and  of  social  utility.  The  utility  of  anything  to  an  indi- 
vidual figures  in  the  determination  of  value  only  to  the  extent 
(in  most  cases  infinitesimal)  that  the  individual  choice  goes 
to  determine  or  change  the  choice  of  the  community.  If  I 
have  a  potato  field  at  home,  that  will  not  obviate  the  necessity 
of  my  paying  the  market  price  for  potatoes.  If  I  am  directed 
by  my  physician  to  live  on  potatoes  exclusively,  that  will  not 
lead  the  dealer  to  charge  more  than  the  market  price.  The 
demand  that  tells  is  the  aggregate  social  demand,  depending 
on  the  social  utility. 

Conversely,  the  cost  that  influences  value  is  not  the  cost  of 
production  of  that  particular  commodity  to  the  individual  pro- 
ducer. It  may  take  me  two  days  to  make  with  old  tools  a 
table  which  fully  equipped  carpenters  can  turn  out  in  a  few 
hours.  I  can  get  for  my  table  no  more  than  the  carpenters 
for  theirs.  The  carpenters  can  get  this  price  for  their  table, 
not  because  it  has  cost  them  so  much  work,  but  because  they 
save  the  members  of  society  as  a  whole  the  sacrifice,  or  cost, 
of  making  the  table  for  themselves.  If  there  were  no  carpen- 
ters, society  would  have  to  set  to  work,  abandon  some  of  the 
things  it  does  now,  and  give  up  some  of  its  time  to  make 
tables.  Instead  of  each  member  of  society  devoting  a  part  of 
his  day  to  making  a  part  of  a  table,  society  as  a  whole  sets 
aside  a  certain  class  to  make  nothing  but  tables.  But  what 
society  is  willing  to  pay  for  the  table  is  always  the  marginal 
cost  to  it,  and  this  marginal  cost  is  the  final  sacrifice  which 
society  is  willing  to  incur  for  tables  as  compared  with  other 
things.  What  the  carpenter  can  get  for  the  table  will  adjust 
ttself  to  this  amount  of  social  sacrifice,  and  thus  the  value  of  a 
commodity  gets  to  be  the  equivalent  of  the  (individual)  cost 


§  S;^]  Surplus  and  Progress  201 

of  producing  it.  \Vc  may  thus  roughly  say  that  individual 
labor  or  cost  of  production  fixes  value;  but  what  it  really  does 
is  not  to  fix  value,  but  to  express  the  value  that  is  fixed  by 
social  forces  as  a  whole.  The  value  is  due  not  to  the  labor  of 
the  individual  who  has  made  it,  but  to  the  social  service  which 
it  is  going  to  render,  —  that  is,  to  the  social  sacrifice  which 
it  is  going  to  save.  If  it  does  not  render  that  service,  it  will  not 
possess  that  value,  no  matter  how  much  individual  labor  has 
been  spent  on  it.  On  the  other  hand,  if  less  individual  labor 
be  spent  on  it,  it  wiU  have  less  value,  not  because  less  indi- 
vidual labor  has  been  spent,  but  because  the  marginal  sacrifice 
of  society  is  now  less.  Utility,  and  not  cost,  is  the  ultimate 
cause  of  value. 

We  see,  then,  that  value  may  be  defined  either  as  the  ex- 
pression of  marginal  social  utility  or  as  the  expression  of  the 
marginal  social  sacrifice  incurred  to  secure  utility.  Value  may 
be  estimated  in  terms  of  either  social  utility  or  social  cost,  be- 
cause the  marginal  degree  of  the  one  is  equal  to  that  of  the 
other.  Individual  cost,  however,  affects  value  only  in  the  sense 
that  it  adjusts  itself  to  the  social  utility,  which  is  the  supreme 
test.  Utility  is  the  positive  factor,  cost  is  a  result.  The  exact 
relation  of  individual  cost  of  production  to  value,  however, 
still  remains  to  be  studied,  and  will  be  discussed  later. 

83.   Social  Surplus  and  Progress 

Since  all  progress  consists  in  getting  more  results  with  less 
efforts,  the  problem  of  social  cost  and  social  surplus  becomes 
one  of  basic  importance.  AU  surplus  or  residual  utility  is  the 
balance  of  satisfaction  over  sacrifice.  It  may  therefore  be 
augmented  in  two  ways:  the  sacrifice  may  remain  the  same, 
while  the  satisfaction  increases;  or  the  satisfaction  may  remain 
the  same,  while  the  sacrifice  decreases.  In  the  one  case  we 
deal  with  problems  of  consumption,  in  the  other  with  problems 
of  production.  In  the  one  case  we  approach  the  subject  from 
the  point  of  view  of  utility,  in  the  other  from  that  of  cost. 


20  2  Measure  of  Value  [§  83 

The  social  surplus  may  be  enlarged  by  changes  in  consump- 
tion. The  sacrifice  incurred  by  the  individuals  that  compose 
society  may  remain  the  same,  and  yet  they  may  use  so  much  in- 
telligence in  the  rearrangement  of  their  choices  of  satisfaction 
that  they  may  procure  a  greater  net  result.  It  need  not  cost 
more  effort  to  cook  a  good  dinner  than  an  unpalatable  one, 
and  yet  the  surplus  of  satisfaction  over  sacrifice  is  greater. 
When  the  social  choices  are  improved  on  a  large  scale,  there 
will  be  a  great  increase  in  the  social  surplus. 

While  it  is  possible  to  have  in  this  way  a  larger  satisfaction 
with  the  same  effort,  it  happens  just  as  frequently,  however, 
that  we  can  procure  the  same  satisfaction  with  a  smaller  effort. 
The  emphasis  is  here  laid  not  upon  consumption,  but  upon 
production.  Whatever  diminishes  the  cost  of  production  en- 
larges to  that  extent  the  surplus  of  society.  If  the  dinner 
which  originally  cost  one  dollar  can  now  be  supplied  for  fifty 
cents,  we  shall  have  to  work  less  to  get  that  dinner;  or  if  we 
work  as  hard,  we  shall  have  the  remaining  half-dollar  to  spend 
on  something  new.  All  civilization  depends  on  the  increase  of 
our  wants.  In  most  cases,  however,  the  appearance  of  a  new 
want  requires  additional  effort  on  the  part  of  individuals  for 
its  satisfaction.  If  the  additional  sacrifice  keeps  pace  with  the 
additional  want,  we  are  no  better  off  than  before,  —  there  is 
no  increase  of  the  social  surplus.  But  as  soon  as  we  can  satisfy 
the  old  want  with  a  smaller  total  effort,  the  surplus  is  increased 
because  some  of  the  efforts  previously  devoted  to  the  satisfac- 
tion of  the  old  want  are  now  set  free  for  the  attainment  of  the 
new  object.  With  the  same  output  of  energy  we  secure  greater 
results.  Diminution  of  social  cost  is  the  great  creator  of  social 
surplus. 

While  changes  in  consumption  are  of  significance  in  them- 
selves, they  become  of  great  importance  chiefly  as  engendering 
changes  in  production.  Whether  we  call  the  social  surplus, 
however,  a  consumer's  surplus  or  a  producer's  surplus,  is,  as 
we  know,  immaterial.     It  is  equally  immaterial  whether  we  say 


§  83]  Surplus  and  Progress  203 

thai  the  progress  is  due  to  lower  cost  or  to  greater  utility.  So- 
cial surplus  is  the  result  of  man's  struggle  with  nature.  It  is 
the  margin  between  result  and  effort.  The  way  to  increase  the 
surplus  is  to  maximize  the  results  and  to  minimize  the  efforts,  — 
that  is,  to  increase  utilities  and  to  decrease  costs. 

The  mere  increase  of  the  social  surplus  is,  however,  not  all 
that  is  necessary  to  progress.  Without  such  a  surplus,  indeed, 
there  can  be  no  highly  developed  civilization;  for  where  the 
energy  of  society  is  entirely  occupied  with  procuring  the  bare 
means  of  subsistence,  there  can  be  no  opportunity  for  the 
higher  life.  A  frontier  community  differs  from  a  developed 
one  chiefly  in  the  fact  that  in  the  former  there  is  little  social 
surplus  available.  But  the  mere  production  of  wealth  and 
prosperity  does  not  suffice.  Unless  attention  be  paid  to  the 
problem  of  distribution  as  well,  the  social  surplus  may  remain 
in  the  hands  of  a  favored  few  —  the  "remnant"  of  whom 
Matthew  Arnold  sings  —  while  the  mass  of  the  community 
may  be  largely  shut  out  from  participation  in  its  benefits. 
The  real  democracy  of  industry,  like  the  true  democracy  of 
politics,  does  not  mean  that  every  man  is  the  equal  of  every 
one  else,  but  that  all  should  have  an  equal  opportunity  to  de- 
velop what  is  in  them  for  good.  The  problem  of  social  progress 
is  to  reconcile  the  greatest  possible  social  production  with  the 
best  possible  social  distribution;  to  create  a  continually  grow- 
ing social  surplus  and  to  provide  for  its  equable  division. 
Without  the  latter  we  are  apt  to  have  plutocracy;  without  the 
former  we  can  scarcely  rise  above  savagery. 


CHAPTER  XIV 
THE   CAPITALIZATION  OF  VALUE 

84.   References 

J.  B.  Clark,  Distribution  of  Wealth  (1899),  ch.  ix;  F.  A.  Fetter,  Economic 
Principles  (1915),  part  i;  T.  Veblen,  Theory  of  Business  Enterprise 
(1904),  chs.  v-vi;  M.  Pantaleoni,  Pure  Economics  (1898),  part  3,  ch. 
iii,  §  5;  E.  V.  Bohm-Bawerk,  Positive  Theory  of  Capital  (1891),  bk. 
V,  chs.  i,  ii;  F.  v.  Wieser,  Natural  Value  (1893),  bk.  iv,  ch.  vii;  H. 
Sidgwick,  Principles  (1883),  II,  ch.  vi;  J.  A.  Hobson,  Economics  of  Dis- 
tribution (1900),  ch.  iv;  Irving  Fisher,  Capital  and  Lncome  (1906);  H.  J. 
Davenport,  The  Economics  of  Enterprise,  (1913),  ch.  14-15;  W.  Z. 
Ripley,  Capitalization  of  Public  Service  Corporations  (Quart.  Jour.  Econ., 
XV,  1901);  E.  S.  Meade,  Trust  Finance  (1903),  ch.  xvi;  R.  M.  Hurd, 
Principles  of  City  Land  Values  (1903),  ch.  ix. 

85.   Value  and  Rent 

We  have  learned  that  the  value  of  anything  is  derived  ulti- 
mately from  the  satisfactions  or  uses  which  it  afifords,  and  that 
the  price  is  the  money  equivalent  of  its  uses.  Some  things 
afford  only  a  single  use;  the  use  of  an  ordinary  article  of  food 
consists  in  its  consumption.  Other  things  are  somewhat  more 
durable;  a  suit  of  clothes  can  be  used  for  a  season  or  two  be- 
fore it  is  worn  out;  a  machine  will  last  for  years;  a  house  for 
decades.  Finally,  some  things  permit  of  perpetual  use.  A 
city  lot  will  serve  as  a  building  site  as  long  as  the  city  exists; 
the  privilege  granted  to  a  street  railway  to  occupy  the  public 
highways  remains  the  same  from  decade  to  decade,  although 
the  recipient  of  the  privilege  may  change. 

Things  can  be  sold  either  by  parting  with  their  uses  one  by 
one  or  by  disposing  of  all  their  uses  for  a  lump  sum.  When  I 
ask,  what  is  the  price  of  a  carriage?  the  owner  will  answer,  ten 
dollars  a  day  if  he  means  the  price  of  the  use  for  that  period,  or 

204 


§  85]  Value  and  Rent  205 

a  thousand  dollars  if  he  refers  to  its  use  as  long  as  it  lasts. 
when  we  part  with  the  use  of  a  thing  for  a  limited  period,  the 
payment  is  called  a  rent.  We  may  rent  a  horse  for  an  hour,  or  a 
dress-suit  for  an  evening,  or  a  typewriter  for  a  month,  or  a  house 
for  a  term  of  years.  Strictly  speaking,  the  word  rent  regards 
the  transaction  from  the  standpoint  of  one  who  lends  the 
use  and  secures  a  periodic  return  (rcddiliis) ;  while  the  word 
hire  designates  the  transaction  from  the  point  of  view  of  the 
one  who  enjoys  the  temporary  use.  Commonly,  however, 
this  distinction  is  disregarded,  and  we  speak  indiscriminately 
of  a  man  hiring  or  renting  a  yacht  or  a  house  for  his  own  use. 
The  fundamental  conception  is  the  income,  in  the  sense  of 
pleasure  or  benefit  income,  to  the  user.  Through  the  opera- 
tion of  the  social  forces  which  bring  about  exchanges  based  on 
money,  the  income  value  of  anything  becomes  its  money  rent, 
—  the  amount  of  money  received  by  the  owner  or  paid  by  the 
hirer.  The  income  of  anything  is  the  rent  paid  or  received 
for  its  use. 

Sometimes  the  word  rent  is  limited  to  particular  kinds  of 
rents.  In  England,  for  example,  where  land  formed  the  chief 
form  of  investment  even  as  late  as  the  eighteenth  century, 
rents  came  to  be  synonymous  with  land  rents,  and  when  a  man 
spoke  of  his  rent  roll,  he  meant  the  rentals  which  he  received 
from  his  estate.  As  a  consequence,  the  theory  of  rent  elabo- 
rated by  the  English  economists  came  to  have  a  peculiar 
meaning.  On  the  other  hand,  France,  in  the  century  before 
the  revolution,  had  made  greater  progress  in  general  financial 
enterprise,  and  rentes  came  to  mean  the  income  of  the  fund- 
holder.  A  rentier  to-day  still  denotes  one  who  is  living  on  the 
income  of  his  capital.  As  a  general  economic  conception, 
then,  rent  is  the  periodic  return  (nowadays  calculated  in 
money)  from  the  use  of  a  thing  for  a  definite  period,  whether 
that  thing  consists  of  land,  or  public  funds,  or  anything  else. 
Rent  has  a  threefold  aspect,  (i)  From  the  point  of  view  of 
the  economic  good,  rent  is  the  product:    the  use  that  a  thing 


2o6  Capitalization  of  Value  [§  86 

affords  is  its  product  or  rent.  (2)  From  the  point  of  view 
of  the  owner,  rent  is  the  income  from  the  use  or  prodilct. 
(3)  From  the  point  of  view  of  the  hirer,  rent  is  the  cost  or 
payment  for  the  use.  People  pay  rents  because  they  receive 
in  return  an  income  in  the  shape  of  the  use  afforded  by  the 
things  for  which  they  pay.  Rent  therefore  is  at  once  product, 
income  and  cost. 

When  we  part  with  anything  permanently,  instead  of  with 
some  of  its  uses  for  a  time,  we  often  speak  of  its  selling  or 
market  or  cash  value,  as  opposed  to  its  rental  value.  Strictly 
speaking,  this  contrast  is  inaccurate.  When  we  rent  anything, 
we  are  also  dealing  with  selling  value;  but  what  we  sell  is  a 
single  use,  or  several  uses,  rather  than  all  its  uses.  Sometimes 
again  we  speak  of  property  value  as  opposed  to  rental  value. 
The  advantage  of  this  nomenclature  is  that  as  long  as  we  con- 
trol the  property  we  control  all'  possible  present  and  future 
uses;  the  disadvantage  is  that  property  is  a  legal  conception, 
while  rent  is  an  economic  conception.  A  man  also  has  prop- 
erty in  his  rents.  The  real  contrast,  as  was  pointed  out  above 
(§  6),  is  between  rental  value,  in  its  strict  meaning  of  income 
value,  and  capital  value.  When  a  man  sells  one  or  more  uses 
of  a  thing,  he  estimates  its  capital  value.  Roughly  speaking, 
he  rents  in  one  case  and  sells  in  another;  strictly  speaking, 
he  sells  in  both  cases,  but  the  price  represents  a  limited  use 
in  one  case  and  an  unlimited  use  in  the  other. 

The  question  now  arises,  what  is  the  relation  of  rental  value 

to   capital   value,   and   how   do   we   come   to   estimate   capital 

values? 

86.   The  Law  of  Depreciation 

The  durability  of  economic  goods  is  essentially  relative.  At 
the  one  end,  as  we  have  seen,  are  the  merely  ephemeral  acts 
or  the  things  which  are  consumed  by  a  single  use,  like  a  paper 
napkin  or  an  apple.  At  the  other  end  is  a  building  site,  which 
can  support  a  structure  to  the  end  of  time.  Between  these 
extremes  lie  the  great  mass  of  commodities.     They  all  wear  out 


§  86]  Law  of  Depreciation  20*7 

sooner  or  later,  and  as  they  wear  out  they  become  incapable 
of  affording  as  many  or  as  effective  uses.  Sometimes  the  de- 
preciation is  rapid,  as  with  a  flimsy  silk  dress;  sometimes  the 
commodity  lasts  longer,  as  in  the  case  of  an  ordinary  machine; 
sometimes  it  is  very  substantial,  as  in  the  case  of  a  modern  sky- 
scraper. In  every  instance,  however,  if  it  is  intended  to  be 
used  permanently,  repairs  are  needed.  Nothing  is  indestruc- 
tible except  land,  and  even  that  is  so,  as  we  shall  see  later 
(§  132),  only  in  the  peculiar  sense  that  its  extension  remains. 
It  is  obvious  that  the  capital  value  of  anything  depends  in  the 
first  instance  on  the  number  of  rental  values,  allowance  being 
made  for  wear  and  tear.  Where  the  good  is  ephemeral  in  the 
sense  that  it  affords  only  a  single  use,  the  rental  value  and  the 
capital  value  coalesce.  The  rental  value  is  the  capital  value. 
We  cannot  buy  the  privilege  of  using  the  coal  or  ice  even  once, 
without  buying  the  coal  or  ice  itself.  The  wear  and  tear  here 
equal  the  entire  value,  the  single  use  is  the  consumption. 
When,  however,  we  may  expect  a  moderate  succession  of  uses, 
there  is  a  difference  between  the  rental  value  and  the  capital 
value.  Where  the  depreciation  is  rapid  the  difference  is  not 
great.  A  row-boat  is  quickly  worn  out,  and  even  a  single  use 
may  injure  it  severely.  A  boat  which  sells  for  sixty  dollars 
will  often  rent  for  half  that  amount  for  a  single  summer,  and 
the  capital  value  is  then  only  double  the  annual  rental  value. 
The  boat  may  last  for  several  years,  but  the  older  it  grows,  the 
greater  the  need  of  repairs  and  the  smaller  the  net  uses  which 
it  is  capable  of  yielding,  until  finally  the  expense  of  repair 
exceeds  the  income,  and  the  boat  is  thrown  aside  as  worthless, 
possessing  no  capital  value  because  it  no  longer  has  a  single 
rental  value.  Where  a  larger  number  of  uses  can  be  enjoyed 
with  comparatively  little  depreciation,  as  in  a  well-built  house, 
the  selling  value  is  frequently  ten  or  twenty  times  the  annual 
rental  value.  It  may  be  four  or  five  years  before  any  repairs 
are  needed,  but  with  each  ensuing  year  the  decay  progresses 
and  the  cost   of  repairs  augments,  until  here  also  the  time  ar- 


2o8  Capitalization  of  Value  [§86 

rives  when  there  is  no  longer  any  surplus  of  income  over  outgo, 
of  enjoyment  over  exertion.  In  practical  life  business  men 
guard  against  the  results  of  depreciation  by  instituting  a  sinking 
fund.  Instead  of  spending  all  the  earnings,  they  set  aside  an 
annual  sum  which  wUl  counterbalance  the  depreciation,  so  that 
at  the  end  of  a  period  the  accumulated  fund  will  sink  or  offset 
the  outlay  incurred  to  replace  the  commodity.  The  repairs, 
in  other  words,  may  be  made  from  year  to  year,  or  may  be 
allowed  to  accumulate,  and  made  aU  at  once  at  a  subsequent 
period.  Where  no  repairs  are  possible,  as  in  a  mine,  the  an- 
nual rent  must  stUl  exceed  that  of  ordinary  land  which  osten- 
sibly yields  the  same  annual  returns,  because  the  mine  will 
ultimately  be  exhausted  and  a  part  of  the  rent  must  be  put  to 
the  sinking  fund  or  depreciation  account,  or  goes  to  satisfy  the 
expectation  that  the  rental  value  will  cease. 

The  fundamental  explanation,  therefore,  of  the  relation  of 
capital  value  to  rental  value  is  durability,  or  the  degree  of 
succession  of  rental  values.  Capital  value  depends  on  net 
rent,  not  on  gross  rent;  that  is,  it  depends  on  the  succession 
of  gross  returns,  less  repairs.  Capital  value  is  reached  by 
adding  together  the  gross  rentals  and  deducting  the  sinking 
fund.  The  ratio  of  capital  to  rental  value  depends  in  the  first 
instance  on  the  number  of  rental  values. 

This  does  not  mean  that  more  permanent  commodities  have 
a  greater  capital  value  than  less  durable  goods.  Iron  has  less 
value  than  sUk,  although  it  is  far  more  durable.  The  statement 
means  that  when  the  gross  rental  of  two  commodities  is  the 
same  —  that  is,  when  the  price  paid  for  the  use  of  each  for  a 
definite  period  is  identical  —  the  difference  in  their  capital 
values  is  to  be  explained  by  the  relative  number  of  such  uses 
which  each  can  afford.  The  rent  of  a  house,  as  well  as  that  of 
a  horse,  may  be  twenty  dollars  a  month,  yet  the  house  will  sell 
for  far  more  than  the  horse.  Neither  would  have  any  capital 
value  if  it  had  no  rental  value.  The  rental  value  of  both  is  the 
same,  because  the  marginal  utility -of  a  month's  use  of  each  is 


§  87]  Law  of  Future  Estimates  209 

identical;  that  is,  the  individuals  forming  that  economic  group 
get  on  the  whole  as  much  satisfaction  out  of  a  horse  as  they 
do  out  of  a  house.  The  capital  value  of  the  horse,  however, 
is  less  than  that  of  the  house,  because  he  will  be  more  quickly- 
worn  out,  —  that  is,  because  he  cannot  furnish  an  equally  long 
succession  of  uses. 

Capital  is  capitalized  income.  Capital  value  is  a  stock  or  fund 
of  rental  values;  the  larger  the  number  of  such  rental  values 
which  flow  in  from  a  commodity,  the  greater  will  be  its  capital 
value  in  proportion  to  its  rental  value.  The  relation  of  capital 
to  rental  value  depends  in  first  instance  upon  durability. 

87.   The  Law  of  Future  Estimates 

The  uncivilized  individual  lives  only  in  the  present.  His 
wants  are  spasmodic,  and  as  soon  as  he  has  gratified  these 
pressing  needs  he  has  no  thought  for  the  morrow.  With  every 
advance  in  culture  he  displays  more  prudence  and  foresight. 
Even  some  of  the  more  highly  developed  animals,  like  ants, 
bees  and  squirrels,  have  an  eye  to  the  future,  and  in  the  time 
of  plenty  lay  in  a  stock  for  the  days  to  come.  The  philoso- 
phers teU  us  that  the  real  pleasures  of  life  are  those  of  antici- 
pation and  retrospection.  But  this  is  true  only  of  the  most 
highly  organized  natures,  and  true  only  in  part  even  of  them. 
To  the  mass  of  individuals  present  needs  and  present  satisfac- 
tions are  the  all-engrossing  ones. 

The  result  of  this  psychological  fact  is  that  we  lay  more 
stress  on  present  enjoyments  than  on  future  enjoyments.  To 
the  average  man  a  bird  in  the  hand  is  worth  two  in  the 
bush,  even  though  he  thinks  that  he  will  secure  the  two. 
Our  estimate  of  the  future  is  more  or  less  uncertain,  because 
we  can  never  be  absolutely  sure  of  anything  but  the  actual. 
The  future  may  have  in  store  for  us  either  some  change  in  the 
intensity  of  our  wants  or  in  the  capacity  of  the  particular  ser- 
vice to  satisfy  our  wants.  Present  wants  and  satisfactions  are 
definitely  measurable,  because  the  degree  of  the  one  and  the 
14 


2IO  Capitalization  of  Value  [§  87 

quantity  of  the  other  are  fixed.  Future  wants  and  satisfactions 
are  less  definitely  measurable,  because  of  the  concurrent  or 
opposite  changes  that  may  take  place  before  the  future  ripens 
into  the  present.  Hence  the  underestimate  of  the  future  as 
compared  to  the  present.  That  is  what  we  mean  when  we 
speak  of  discounting  the  future;  we  "count  off"  a  part  of  the 
enjoyment  to  come. 

The  law  of  lower  future  estimates  is  a  part  of  a  larger  law. 
with  one  aspect  of  which  we  have  already  become  familiar. 
All  sense  impressions  may  be  reduced  to  those  of  space  and 
of  time.  When  we  deal  with  space  impressions  and  apply 
them  to  economic  life,  we  are  in  presence  of  the  law  of  dimin- 
ishing space  utility;  every  additional  increment  in  the  supply 
of  an  actual  commodity  existing  in  space  has,  as  we  know 
(§  73)  J  ^  decreasing  importance.  When  we  deal  with  time  im- 
pressions, we  are  in  presence  of  the  law  of  diminishing  time 
utility;  every  additional  postponement  in  the  enjoyment  of  a 
commodity  causes  it  to  have  a  decreasing  importance  for  us. 
Nothing  has  utihty  unless  it  exists  in  space  and  time.  In- 
crease the  space  relation,  that  is,  augment  the  supply,  and  you 
decrease  the  marginal  utility;  increase  the  time  relation,  that  is, 
postpone  the  gratification,  and  you  again  decrease  the  mar- 
ginal utility.  In  one  case  we  deal  with  a  margin  of  space;  in 
the  other  with  a  margin  of  time.  The  etTect  is  the  same. 
Increase  the  supply  to  a  certain  point,  and  the  marginal  utility 
or  value  will  disappear;  augment  the  postponement  of  the  sat- 
isfaction to  a  certain  point,  and  the  marginal  utility  or  value 
will  likewise  disappear. 

The  present  estimate  of  a  future  satisfaction  is  therefore 
ordinarily  less  than  that  of  a  present  satisfaction;  the  present 
value  of  a  future  enjoyment  is  less  than  that  of  an  immediate 
enjoyment.  The  present  estimate  of  future  uses  becomes 
fainter  as  the  use  recedes  into  the  future,  until  the  value  of 
a  very  distant  use  vanishes.  Therefore,  while  a  commodity 
with   a   present   rental   value   may   hold   out   the   prospect   of 


§  87]  Law  of  Future  Estimates  2 1 1 

many  successive  rental  values,  the  present  worth  of  each  of 
those  future  rental  values  becomes  progressively  smaller.  Since 
the  capital  value  of  anything  is  the  present  worth  of  all  the 
successive  future  rental  values,  it  is  clear  that  the  dispro- 
portion between  the  rental  and  the  capital  value  will  not  grow 
simply  with  the  durability  of  the  commodity;  for  the  more 
durable  the  commodity,  the  fainter  will  be  the  present  estimate 
of  the  distant  use,  until  finally  a  further  increase  in  durability 
will  add  nothing  to  the  value.  A  building  site  may  rent  for  a 
fixed  sum,  and  may  reasonably  be  expected  to  yield  that  rent 
for  an  indefinite  period.  Yet  when  it  is  sold  it  will  bring  as 
capital  value  a  sum  equivalent  to  only  about  twenty  or  twenty- 
five  times  the  rental  value.  There  is  no  depreciation  of  the 
land,  there  is  no  wear  and  tear,  and  no  necessity  for  a  sinking 
fund,  and  yet  the  land  is  worth,  as  it  is  called,  only  twenty 
years'  purchase;  that  is,  it  can  be  purchased  for  a  sum  twenty 
times  the  annual  rent,  even  though  in  all  human  probability  it 
will  go  on  yielding  an  annual  rent  for  an  indefinite  future. 

The  relation  between  rental  and  capital  value,  therefore,  is 
a  resultant  of  two  forces,  —  the  law  of  depreciation  and  the 
law  of  future  estimates.  From  one  point  of  view,  the  more 
durable  the  commodity  and  the  larger  the  number  of  successive 
uses,  the  greater  will  be  the  disproportion  between  rental  and 
capital  value;  from  another  point  of  view,  the  more  durable 
the  commodity  and  the  more  remote  the  succession  of  future 
uses,  the  less  will  the  disproportion  be.  Both  of  these  state- 
ments may  be  summed  up  in  the  assertion  that  the  capital 
value  of  anything  is  the  result  of  adding  together  the  present 
worth  of  each  of  the  successive  rental  values.  If  the  com- 
modity lasts  long  enough  to  furnish  two  equal  annual  rental 
values,  the  capital  value  will  be  slightly  less  than  twice  the  first 
rental  value;  if  we  may  expect  three  rental  values,  the  capital 
value  will  be  somewhat  less  than  three  times  the  first  rental 
value.  Each  increment  which  goes  to  form  the  capital  value 
decreases,  until  finally  there  is  no  further  increment  at  all. 


2 1  2  Capitalization  of  Value  [§  88 

88.   The  Law  of  Diminishing  Returns 

We  have  thus  far  dealt  with  consumers'  goods  —  that  is, 
articles  of  immediate  consumption  —  and  have  seen  that  their 
value  is  derived  from  the  uses  or  enjoyments  which  they  afford. 
Some  goods,  however,  do  not  afford  a  direct  enjoyment,  but 
are  used  as  instruments  to  produce  things  that  afTord  enjoy- 
ments. These  are  hence  called  indirect,  or  instrumental,  or 
production  goods.  It  is  obvious,  however,  that  just  as  the 
capital  value  of  consumption  goods  is  derived  from  their  rental 
values  or  uses,  so  the  value  of  production  goods  is  derived 
from  the  value  of  their  products,  —  the  consumption  goods. 
The  value  of  the  raw  material  is  due  to  the  value  of  the  finished 
commodity.  The  value  of  pig  iron  depends  upon  the  value  of 
the  nails,  billets  and  other  iron  products  into  which  it  enters. 
The  value  of  labor  depends  on  the  value  of  what  tKe  labor 
produces.  Value  starts  with  direct  human  satisfactions,  and 
is  reflected  back  and  back  until  it  attaches  to  the  original 
agent,  act  or  thing  which  is  ultimately  responsible  for  the 
immediate  income  or  inflow  of  satisfaction. 

The  fundamental  law  of  value  is  the  law  of  diminishing 
utility.  The  satisfaction  derived  from  successive  increments 
of  a  consumption  good  diminishes  as  the  supply  increases. 
When,  in  the  same  way,  we  compare  the  utility  of  different 
increments  of  production  goods  or  productive  agents  with  one 
another,  we  are  in  the  presence  of  the  law  of  diminishing 
returns.  Instead  of  the  diminishing  utility  of  direct  services 
afforded  by  something  consumed,  we  think  of  the  diminishing 
return  or  service  afforded  by  something  in  producing  the 
economic  good  which  we  consume.  If  a  man  tends  one  loom, 
he  will  turn  out  a  certain  quantity  of  cloth.  Double  the  looms 
and  he  will  do  double,  or  perhaps  more  than  double,  the  work; 
give  him  four  looms  and  the  output  will  be  fourfold.  After  a 
certain  limit  is  reached,  hov/ever,  the  care  of  each  additional 
loom  will  dissipate  his  energy  and  cause  more  mistakes.     The 


§  88]        Law  of  Diminishing  Returns  2 1  3 

total  output  may  be  larger,  but  the  output  of  each  loom  will 
be  less,  until  finally  new  looms  will  not  augment  the  output 
at  all.  If  we  enlarge  the  supply  of  labor  instead  of  tools,  the 
same  holds  good.  More  effort  means,  after  a  given  point, 
relatively  smaller  results.  A  rower  may  increase  his  speed 
by  putting  forth  more  exertion,  but  after  a  certain  point  more 
efforts  do  not  mean  greater  speed.  An  increase  of  rowers 
will  not  change  the  law.  Two  men  will  not  row  a  boat  twice 
as  fast  as  one,  four  men  will  not  row  it  twice  as  fast  as  two. 
A  large  omnibus  will  hold  more  people  than  a  small  one,  but 
when  a  certain  size  has  been  reached,  it  will  pay  better  to  buy 
another  omnibus  than,  to  enlarge  the  old  one.  On  a  piece  of 
land  it  may  be  profitable  to  employ  more  men.  as  well  as  to 
use  more  manure  and  better  machinery;  but  after  a  given 
point,  additional  "doses"  of  labor  and  capital  will  begin  to 
give  relatively  smaller  results.  The  law  of  diminishing  returns 
is  universal.  It  is  another  aspect  of  the  law  of  diminishing 
utility.  The  latter  springs  from  the  finite  nature  of  man,  the 
former  from  the  finite  nature  in  the  elements  of  his  environ- 
ment. The  income  or  return  from  a  production  good  or 
productive  agent  is  like  the  income  or  utility  of  a  consumption 
good.  The  test  of  each  is  its  relative  contribution  to  the 
satisfaction  of  wants. 

Just  as  the  law  of  decreasing  utility  results  in  the  conception 
of  marginal  utility  —  the  foundation  of  all  value  —  so  the  law 
of  diminishing  returns  results  in  the  conception  of  marginal 
utilization.  This  margin  is  the  point  beyond  which  an  addi- 
tional effort  will  not  give  a  sufficient  return.  The  margin 
may  be  either  intensive  or  extensive.  If  we  crowd  more 
people  into  the  same  omnibus,  or  run  more  trains  over  the 
same  track,  or  make  the  laborer  tend  more  looms,  or  put  more 
manure  into  the  same  field,  we  have  a  more  intensive  utiliza- 
tion, until  finally  the  intensive  margin  is  reached  where  the 
additional  returns  will  not  compensate  the  additional  effort 
or  outlay.     On  the  other  hand,  the  crowding  of  the  omnibus 


2  14  Capitalization  of  Value  [§89 

may  drive  passengers  to  another  line,  the  multiplication  of 
trains  may  cause  accidents,  the  added  looms  may  mean  more 
breakage,  the  increase  of  manure  may  be  unduly  costly.  In 
such  cases  the  owner  will  find  it  profitable  to  purchase  new 
vehicles,  build  a  double  track,  hire  more  workmen,  or  secure 
additional  plots  of  fresher  land.  This  would  be  an  extensive 
utilization,  carried  on  until  the  extensive  margin  is  reached, 
when  it  will  not  pay  to  add  another  vehicle,  track,  laborer  or 
plot.  The  margin,  whether  intensive  or  extensive,  is  reached 
through  the  operation  of  the  law  of  diminishing  returns.  Just 
as  the  value  of  every  consumption  good  depends  upon  its 
marginal  utility,  so  the  value  of  every  production  good  or 
productive  agent  (which  is  derived  from  the  consumption 
goods  which  it  produces)  depends  upon  its  marginal  product, 
that  is,  its  product  at  the  margin  of  utilization. 

89.     Forms  of  Value 

If  we  analyze  the  things  that  are  bought  and  sold  in  the 
market  we  find  that  they  may  be  divided  into  four  classes: 
first,  human  services,  from  those  of  the  day  laborer  to  those 
of  the  highest  professions;  second,  concrete  goods,  or  com- 
modities, whether  production  goods  or  consumption  goods; 
third,  relations  and  privileges  of  all  kinds;  fourth,  a  fund  of 
capital. 

In  the  first  class  obviously  only  the  single  use  can  be 
sold.  A  service  is  a  use,  it  is  not  a  fund  of  stored  up  uses. 
Here,  then,  the  selling  price  of  the  economic  good  (the 
service)  is  the  rental  price.  We  speak  of  hiring  a  man,  just 
as  of  hiring  a  piano.  When  we  hire  him  for  a  definite  task, 
we  rent  his  service;  if  we  engage  him  by  the  day  or  month  or 
year,  we  rent  a  limited  succession  of  services.  The  only  way 
in  which  all  the  services  of  the  man  can  be  sold  at  once  is 
when  he  is  a  slave,  and  thus  acquires  a  definite  money  value 
as  a  piece  of  property.  In  a  state  of  freedom  a  man  never 
parts  with  all   his  future  services  for  a  lump  sum.     The  price 


§  Sg]  Forms  of  Value  215 

paid  for  human  services  is  not  commonly  called  rent,  although 
we  do  speak  of  an  Italian  padrone  in  America  renting 
out  his  immigrant  compatriots,  or  of  the  Southern  prison 
officials  renting  out  their  convicts.  Ordinarily  the  income 
derived  from  human  service  is  called  wages  (or,  in  the  case 
of  the  professional  classes,  salaries  or  fees).  Wages,  then,  are 
always  income;  they  are  never  capital,  nor  can  they  be 
capitalized  except  in  the  case  of  slavery.  It  is  only  then 
that  we  can  properly  speak  of  human  capital,  or  of  capital 
invested  in  human  beings. 

The  next  two  categories,  which,  as  we  shall  see  later,  differ 
in  important  ways,  may  be  classed  together  in  this  respect,  that 
they  both  possess  a  rental  or  income  value  as  well  as  a  capital 
value.  A  piece  of  land,  a  ship  and  a  patent  right  may  either 
be  rented  out  from  year  to  year  or  parted  with  entirely  for  a 
lump  sum.  Their  product  is  always  a  rent,  although  the  rent 
may  be  capitalized. 

Finally,  as  opposed  to  individual  economic  goods  which 
have  a  capital  value,  there  is  the  general  fund  of  capital.  Just 
as  we  speak  of  wealth  in  general  as  consisting  of  pieces  of 
wealth,  or  of  labor  in  general  as  composed  of  the  individual 
laborers,  so  we  speak  of  capital  in  general  as  the  assemblage 
of  individual  pieces  of  capital.  Capital  as  a  general  concep- 
tion stands  in  the  same  relation  to  the  individual  pieces  of 
capital  as  a  flock  does  to  the  sheep  or  a  forest  to  the  trees; 
the  sheep  and  trees  are  constantly  disappearing  and  being 
replaced  by  new  accessions;  the  flock  or  forest  persists, 
although  the  constituent  elements  are  perpetually  changing. 
Capital  as  a  fund  of  wealth  is  the  embodiment  of  value  or 
I)urchasing  power,  and  money  is  everywhere  the  measure 
of  general  purchasing  power.  Capital,  therefore,  as  a  fund 
of  value  can  be  estimated  or  transferred  in  the  shape  of  the 
money  which  represents  this  value.  We  cannot  buy  the  flock 
of  sheep  without  buying  the  individual  sheep,  but  through 
the  interposition  of  money  and  credit  we  can  acquire  capital 


21 6  Capitalization  of  Value  [§89 

in  the  shape  of  general  purchasing  power,  and  ihen  devote  it 
Lo  ;iny  use  we  desire.  We  can  use  it  in  production  and  build 
a  factory,  or  we  can  use  it  for  consumption  and  buy  a  yacht. 
We  can  put  the  fund  of  capital  into  concrete  goods  like 
machines  or  land,  or  into  privileges  like  franchises  or  patents. 
When  we  buy  capital  in  general,  therefore,  we  buy  the  right  of 
enjoying  any  future  uses  that  we  may  elect;  we  are  not  restricted 
to  the  particular  uses  afforded  by  the  individual  good  in  which 
our  capital  is  temporarily  embodied.  The  use  of  the  sheep  is 
limited;  the  use  of  the  capital  invested  in  the  sheep  is  poten- 
tially unlimited,  because  it  can  be  changed  at  will  to  any  other 
form. 

When  we  purchase  the  temporary  use  of  an  individual 
economic  good,  therefore,  we  pay  a  rent;  but  when  we  pur- 
chase the  temporary  use  of  a  fund  of  capital  in  general,  the 
payment  is  called  interest.  Interest,  hence,  is  nothing  but 
commuted  rent,  just  as  'capital  is  nothing  but  capitalized 
income.  Instead  of  hiring  a  particular  piece  of  capital  and 
paying  rent,  we  hire  a  fund  of  capital  in  general  and  pay 
interest.  Interest,  then,  is  not  paid  for  money,  but  for  the 
capital  which  the  money  represents.  It  is  really  not  paid  for 
the  capital,  but  for  the  uses  afforded  by  the  capital  when 
transmuted  into  the  individual  things  which  afford  services. 
Interest  of  capital  is  based  upon  the  rents  of  individual  pieces 
of  capital.  The  single  thing  yields  a  rent  because  it  affords  a 
return  or  product.  If  we  add  together  all  the  net  rents  of 
existing  goods  or  pieces  of  capital,  we  get  the  entire  amount  of 
interest'.  Total  net  rent  at  any  given  time  is  equal  to  total 
interest.  Each  consists  of  the  whole  of  the  product  or  income 
from  all  existing  wealth  which  is  or  can  be  capitalized,  —  that 
is,  of  the  aggregate  of  J:he  return  from  all  existing  pieces  of 
capital.  The  only  difference  is  that  interest  is  the  calculation 
form  of  rent.  Rent  is  figured  in  dollars  and  cents;  interest 
as  commuted  rent  is  figured  as  a  part  of  the  whole  or  as  a 
percentage  of  a  principal.     The  rent  of  a  house  is  so  many 


§  9o]  Value  as  a  Differential  2 1 7 

dollars  a  year,  the  interest  of  the  capital  invested  in  the  house 
is  so  much  per  cent  a  year. 

Wages,  rent  and  interest,  therefore,  are  analogous  phenom- 
ena. They  are  all  prices,  even  though  prices  in  the  language 
of  the  street  are  ordinarily  restricted  to  the  selling  values  of 
concrete  objects.  When  we  contrast  wages  and  prices,  we 
really  contrast  prices  of  human  services  with  prices  of  things; 
when  we  contrast  rents  and  prices,  we  really  contrast  rental 
values  of  things  with  capital  values  of  things.  Wages  are  the 
price  of  the  services  of  man;  rent  is  the  price  of  the  services 
of  particular  things  and  relations,  that  is,  particular  pieces  of 
capital;  interest  is  the  price  of  services  of  the  general  fund  of 
capital.  At  the  one  end  is  labor,  which  can  never  be  capital- 
ized; at  the  other  end  is  the  fund  of  capital,  which  is  always 
capitalized;  in  between  are  the  individual  economic  goods, 
whose  services  may  or  may  not  be  capitalized,  and  for  which 
people  will  pay  either  rents  or  so-called  prices. 

90.   Value  as  a  Differential 

All  value  may  be  considered  as  a  differential.  In  each 
variety  of  goods  there  will  be  different  grades  corresponding 
to  different  uses.  A  good  boat  will  rent  for  more  than  a  poor 
one;  and  if  it  is  "no  good"  at  all,  it  will  not  rent  for  any- 
thing. Rent  therefore  may  be  measured  as  a  differential  from 
a  margin  or  base  line  of  no-rent,  and  the  rent  of  anything  may 
equally  well  be  defined  to  be  the  differential  return  or  surplus 
over  the  no-rent  or  marginal  articles  of  the  class. 

It  must,  however,  not  be  forgotten  that  almost  everything 
is  susceptible  either  of  more  than  a  single  kind  of  use  or  of 
different  uses  to  different  people.  The  boat  may  be  useless  for 
sailing,  but  good  for  rowing;  it  may  be  useless  for  rowing,  but 
excellent  for  firewood.  A  piece  of  land  may  be  of  no  use  for 
wheat-raising,  but  good  for  alfalfa;  it  may  be  useless  for  alfalfa, 
but  admirably  adapted  to  pasture.  The  margin  or  base,  there- 
fore, from  which  rents  arc  calculated  may  i)c  only  a  relative 


2 1 8  Capitalization  of  Value  [§  go 

and  not  an  absolute  no-rent  margin.  The  rent  of  a  particular 
plot  of  good  wheat  land  may  be  calculated  as  the  surplus 
produce  over  the  worst  plot  at  the  margin;  but  that  no-wheat - 
rent  plot  may  yield  a  substantial  rent  as  perhaps  the  best 
of  pasture  plots.  It  is  only  when  a  given  object  is  of  no 
use  for  any  purpose  that  we  can  speak  of  an  absolute  no-rent 
margin. 

Since  therefore  the  uses  of  things  shade  into  each  other,  wc 
can  take  any  use  as  a  margin  or  base  from  which  to  measure  a 
higher  use.  The  rent  of  anything  may  be  regarded  as  a  differ- 
ential surplus  over  a  lower  use,  or  as  a  margin  from  which  to 
measure  a  higher  use.  All  value  is  the  expression  of  marginal 
utility;  each  margin  is  relative  as  compared  to  some  other 
margin.  Rent  as  the  quantitative  expression  of  this  marginal 
utility  may  be  estimated  either  as  a  whole  or  as  a  surplus  over 
something  else. 

In  precisely  the  same  way  capitalized  rent,  or  selling  value, 
may  be  regarded  as  a  surplus.  If  a  fine  sail-boat  sells  for  one 
hundred  dollars,  we  can  regard  twenty  dollars  as  a  surplus 
value  of  a  fine  boat  over  a  poorer  one;  another  twenty  dollars 
as  a  surplus  of  a  poor  sail-boat  over  a  good  row-boat;  and  so 
on  until  finally  the  last  of  the  hundred  dollars  will  represent 
a  surplus  of  the  worst  boat  over  a  boat  which  is  not  even  good 
enough  to  use  as  firewood.  Again,  what  is  true  of  rent  is  true 
of  wages.  Rent  is  the  income  from  things,  wages  the  income 
from  acts;  both  are  the  income  from  services.  The  wages  of 
a  particular  man  or  class  may  be  regarded  as  a  surplus  over 
the  wages  of  a  lower  grade  class,  until  finally  we  get  to  the 
individual  who  receives  no  wages  at  all  because  he  is  of  no 
use,  and  who,  if  he  survives,  must  be  supported  by  the  com- 
munity. The  law  of  wages  must  be  the  same  as  the  law  of 
rent,  because  wages  are  really  rents  of  a  certain  kind,  rents  of 
acts  instead  of  rents  of  things.  When  therefore  the  traditional 
discourses  of  economics  speak  of  the  rent  principle,  or  of 
"quasi-rents,"  in  the  sense  of  temporary  instead  of  permanent 


§  gol  Value  as  a  Differential  2  1 9 

or  normal  surpluses,  they  are  correct  as  far  as  they  go,  but  do 
not  go  far  enough.  What  they  really  mean  is  the  differential 
principle,  which  is  true  of  all  incomes,  whether  land  rents  or 
other  rents,  whether  rents  in  general  or  other  selling  values, 
whether  the  income  of  things  or  that  of  services. 

When  we  deal  with  the  fund  of  value  known  as  capital  in- 
stead of  with  individual  pieces  of  capital,  we  are  also  in  the 
presence  of  a  differential,  but  in  another  sense.  Individual 
commodities  differ  in  grade  of  utility,  and  therefore  their  rents 
(and  capital  values)  differ.  Capital  as  a  fund,  on  the  other 
hand,  is  the  money  value  of  all  existing  commodities  lumped 
together.  Individual  commodities  are  heterogeneous;  the 
fund  of  capital  is  homogeneous.  There  is  no  general  rate  of 
rents;  there  is-  a  general  rate  of  interest.  Hence  interest 
cannot  be  a  differential  in  the  same  sense  as  rent.  Yet  the 
word  "interest"  itself  means  difference.  Interesse  in  Latin  was 
the  sum  that  lay  between  (inter)  the  original  loan  and  its 
return.  Although  the  mediaeval  writers  confused  money  and 
capital,  thinking  that  interest  was  paid  for  the  use  of  the 
money  itself,  they  nevertheless  justified  interest,  so  far  as  it  was 
a  recompense  for  the  delay  in  repayment.  We  who  now  know 
that  interest  is  a  method  of  calculating  rent  realize  that  it  is 
not  simply  a  question  of  delaying  repayment,  but  of  postpon- 
ing enjoyment,  and  that  interest  may  be  measured  not  only 
positively,  but  as  a  differential  or  surplus  of  present  over  future 
values. 

Interest,  in  other  words,  is  a  discount,  or  difference  between 
the  present  and  future.  When  a  banker  discounts  a  bill,  he 
deducts  from  the  face  value  a  sum  equivalent  to  the  interest 
for  the  period  the  bill  has  to  run.  Both  rent  and  interest, 
therefore,  as  forms  of  value,  express  an  estimate  of  marginal 
uses.  Rent  regarded  as  a  differential  deals  with  the  marginal 
uses  in  space;  interest  regarded  as  a  differential  deals  with  the 
marginal  uses  in  time.  Rent  is  the  difference  in  the  value  of 
one  present  enjoyment  over  another;    interest  is  the  difference 


2  20  Capitalization  of  Value  [§91 

in  the  value  of  a  present  over  a  future  enjoyment.  How  the 
estimate  of  this  difference,  or  the  rate  of  interest,  is  arrived  at 
in  actual  life  is  a  matter  for  later  consideration  (§  167). 

91.   Relation  of  Rental  and  Capital  Values 

Since  interest  is  commuted  rent  and  capital  is  capitalized 
rent,  it  might  be  assumed  that  rental  values  and  capital  values 
of  the  same  things  would  always  vary  together.  If  a  house 
rents  for  the  same  amount  in  New  York  as  in  Yukon,  or  if  a 
house  to-day  rents  for  as  much  as  it  did  ten  years  ago,  ought 
not  the  capital  value  to  be  the  same?  In  point  of  fact,  how- 
ever, there  is  no  such  exact  correspondence  between  rental 
and  capital  values.     This  is  due  to  several  causes. 

In  the  first  place,  the  rate  of  capitalization  is  only  another 
way  of  describing  the  rate  of  interest.  The  rate  of  interest, 
however,  or  the  degree  of  discounting  of  the  future,  differs  from 
place  to  place  and  from  age  to  age.  The  rental  value,  that 
is,  the  income,  of  a  given  railway  bond  not  so  long  ago  was  six 
dollars  a  year,  and  its  capital  value  one  hundred  dollars.  In 
1905,  with  no  changes  of  importance  in  the  character  or  the 
earnings  of  the  railroad  itself,  the  same  bond,  with  the  same 
income,  was  worth  half  as  much  again.  This  increase  of  fifty 
per  cent  in  the  proportion  of  capital  value  to  rental  value  was  due 
to  the  fall  in  the  general  rate  of  interest  on  all  similar  capital 
from  six  to  three  or  four  per  cent.  The  discount  on  future  en- 
joyments had  appreciably  diminished.  What  is  true  of  the  part 
of  a  fund  of  capital  represented  by  bonds,  is  true  of  the  indi- 
vidual pieces  of  capital  like  a  house.  Two  houses  that  rent  for 
the  same  amount  in  New  York  and  Yukon  will  sell  for  very  dif- 
ferent sums,  because  the  rate  of  interest  is  low  in  New  York 
and  high  in  Yukon.  The  cause  of  changes  in  interest  will  be 
studied  later. 

Secondly,  since  capital  value  depends  on  an  estimate  of 
the  future,  it  is  often  much  more  uncertain  than  rental  value. 
It  is  affected  by  all  sorts  of  hopes  and  fears.     It  is  subject 


§  9i]  Rental  and  Capital  V^alues  221 

to  the  play  of  speculation.  Rental  value  deals  with  the 
present  moment  or  the  immediate  future;  we  are  reasonably- 
certain,  so  far  as  anything  mundane  is  certain,  of  the  exact 
quantum  of  enjoyment.  Capital  value  as  a  summation  of 
more  or  less  distant  enjoyments  is  exposed  to  all  the  muta- 
tions of  human  experience.  The  same  rental  values  may 
mean  now  relatively  high,  and  now  relatively  low,  capital 
values.  A  comparison  in  1901  of  47  industrial  corporations 
with  37  railroads  showed  earnings  of  13.6  per  cent  on  the 
market  value  of  the  industrial  stocks,  and  4.85  on  that  of 
railroad  stock.  The  same  income  or  rental  value,  in  other 
words,  represented  a  difference  of  almost  300  per  cent  in 
capital  value.  Rental  values;  no  matter  how  they  fluctuate, 
are  more  stable  than  capital  values.  That  this  is  true  of  the 
fund  of  capital  is  obvious  to  any  one  who  watches  the  transac- 
tions on  the  stock  exchange.  That  it  is  equally  true  of  indi- 
vidual pieces  of  capital  can  be  seen  when  we  remember  that 
in  the  ante-bellum  days  of  the  South,  when  negroes  were 
simply  a  part  of  capital,  the  rental  price  of  slaves  in  1820  and 
i860  remained  at  about  the  same  figure,  $110,  while  the 
capital  value  of  slaves  increased  from  a  few  hundred  dollars  to 
$1500  or  $2000.  This  growing  disproportion  between  capital 
and  rental  value  was  indeed  due  in  part  to  the  fall  in  the  rate 
of  interest,  but  in  far  greater  measure  to  the  over-capitalization 
of  slaves  resulting  from  the  peculiar  economic  conditions  of 
the  time. 

Finally,  in  the  third  place,  where  there  are  special  advan- 
tages in  the  permanent  as  opposed  to  the  temporary  possession 
of  certain  things,  capital  values  will  be  relatively  higher  than 
the  rental  values.  In  England  a  country  estate  is  prized  for 
the  social  and  political  advantages  it  brings,  —  and  these  ad- 
vantages accrue  not  to  the  annual  tenant  but  to  the  owner. 
It  is  not  surprising,  therefore,  to  find  that  at  the  end  of  the 
eighteenth  century  land  in  England  was  worth  from  twenty- 
eight  to  thirty  years'  purchase,  while  funded  property  was  worth 


222  Ciipitalization  of  Value  [§91 

only    from    sixtceu   lo   eighteen   years'    i)urchase.     'i"he   disjjro- 
portion  is  less  to-day,  but  still  appreciable. 

Capital  value  is  therefore  always  based  on  rental  value,  but 
their  relation  is  not  constant.  It  becomes  necessary,  there- 
fore, to  go  a  step  further  and  to  study  the  causes  which  fix 
values  in  general  and  which,  in  explaining  relative  variations, 
will  throw  more  light  on  the  relation  itself. 


CHAPTER  XV 

DETERMINATION  OF  MARKET  \'ALUE 

92.   References 

M.  Pantaleoni,  Pure  Economics  (1898),  part  2,  chs,  i-iii;  A.  Marshall, 
Principles  (1910),  bk.  v,  chs.  i-ii;  J.  S.  Nicholson,  Principles  (1901),  bk. 
iii,  chs.  iii,  iv;  E.  v.  Bohm-Bawerk,  Positive  Theory  (1891),  bk.  iv,  chs. 
i-vi;  F.  V.  Wieser,  Natural  Value  (1893),  bk.  ii;  A.  T.  Hadley,  Eco- 
nomics (1896),  ch.  iii;  H.  Sidgwick,  Principles  (1893),  bk.  ii,  ch.  ii;  A.  W. 
Flux,  Principles  (1904),  ch.  iii;  H.  R.  Seager,  Principles  (1913),  ch.  vii; 
J.  E.  Cairnes,  Leading  Principles  (1874),  part  i,  chs.  ii,  iv;  J.  A.  Hobson, 
Economics  of  Distribution  (1900),  ch.  i;  F.  A.  Walker,  Political  Economy 
(1888),  part  3,  ch.  i;  F.  W.  Taussig,  Principles  (1911),  ch.  x;  P.  H. 
Wicksteed,  The  Common  Sense  of  Political  Economy  (19 10),  chs.  vi-viii. 

93.   Demand  and  Supply 

.  'AH  value,  as  we  know,  is  the  reflex  of  social  marginal  utility. 
We  have  now  to  study  the  nature  of  the  social  forces  which 
operate  to  translate  into  actual  prices  on  the  market  the  feel- 
ings of  the  individuals  that  comprise  the  group. 

For  the  purposes  of  our  immediate  study  it  makes  no  differ- 
ence whether  we  are  dealing  with  rental  or  capital  values,  or 
again  with  values  of  services  or  values  of  things.  The  general 
principle  of  value  must  be  true  of  all  kinds  of  value.  It  will 
sufi&ce  in  this  chapter  to  take  as  a  type  the  capital  or  selling 
value  of  ordinary  consumption  goods,  remembering  that  every- 
thing here  said  is  equally  applicable  to  all  other  forms  of  value. 

It  is  a  truism  to  affirm  that  value  depends  on  demand  and 
supply.  Strictly  speaking,  demand  denotes  desire.  Since 
one's  desire  for  anything  diminishes  with  additional  incre- 
ments, demand  is,  strictly  speaking,  the  scale  of  the  degree  of 
utility.     A  given  scale  affords  the  law  of  demand.     If  one's 

223 


2  24  Market  Value 


94 


desire  for  anything  for  some  reason  increases,  so  that  he  is 
willing  to  give  more  for  the  same  amount,  we  might  in  this 
sense  speak  of  a  rise  in  the  demand,  that  is,  a  change  in  the 
scale  of  demand.  On  the  other  hand,  if  there  are  several 
people  who  prize  the  commodity  differently,  a  fall  in  the  price 
would  enable  more  individuals  to  satisfy  their  desire,  even 
though  the  scale  of  demand  of  each  remained  unaltered.  There 
would  really  be  an  extension  of  the  consumption,  but  not  of 
the  demand. 

Yet  in  the  ordinary  language  of  economic  life  demand  means 
not  simply  desire,  but  effective  desire,  —  a  desire  which  will 
have  some  effect  in  the  transactions  of  the  market.  Demand 
has  therefore  come  to  mean  elliptically  the  quantity  demanded 
at  a  given  price;  and  when  we  speak  of  a  change  in  the  demand, 
we  refer  not  to  any  alteration  in  the  subjective  scale  of  desire, 
but  to  a  change  in  the  amount  asked  for. 

In  the  same  way  supply  has  come  to  mean  the  quantity 
offered  at  a  given  price  in  the  market.  It  no  longer  denotes 
the  total  amount  in  existence.  That  part  of  the  total  stock 
which  is  not  offered  for  sale  at  a  definite  price  is  not  an  effective 
supply.  The  grain  or  cotton  that  is  allowed  to  rot  in  the  barn 
or  on  the  fields  has  no  influence  on  the  price. 

94.   Market  and  Normal  Price 

By  a  market  was  originally  meant  a  place  in  which  individuals 
met  for  the  exchange  of  commodities  and  services.  Nowa- 
days a  market  means  a  coming  together  of  offers  and  demand 
for  economic  goods,  irrespective  of  the  physical  presence  of  the 
contracting  parties.  The  market  may  be  local,  national  or  in- 
ternational; wherever  definite  quantities  of  goods  are  bought 
and  sold,  there  is  a  market,  and  the  price  at  which  the  exchange 
is  effected  is  the  market  price. 

From  the  nature  of  the  case  this  price  is  subject  to  tempo- 
rary variations,  —  the  higgling  of  the  market,  as  Adam  Smith 
called  it.     The  point  about  which  the  market  price  oscillates 


§  94]  Market  and  Normal  Price  225 

is  called  the  normal  price,  and  sometimes,  although  less  hap- 
pily, the  natural  price,  as  being  the  point  to  which  the  price 
would  naturally  gravitate  if  there  were  no  oscillations.  Mar- 
ket price  is  like  the  surface  of  the  water  agitated  by  the  winds, 
—  the  waves  are  now  above,  now  below  the  surface;  yet  as 
long  as  the  winds  persist  we  never  see  the  glassy  surface.  The 
alternate  activity  of  buyers  and  sellers  is  the  wind  of  commerce, 
which  prevents  the  normal  price  from  becoming  visible. 

Normal  price  itself  may  be  regarded  from  two  points  of  view. 
If  the  conditions  of  production  and  consumption  are  perfectly 
stationary  —  that  is,  if  there  are  no  changes  in  population, 
amount  of  capital,  methods  of  production  or  social  demand  — 
we  speak  of  static  conditions.  Such  a  state  is  largely  hypotheti- 
cal, because  in  all  progressive  society  conditions  are  continually 
changing  or  dynamic.  The  law  is  one  of  movement,  not  of 
rest.  Yet  the  study  of  static  conditions  is  important.  Static 
normal  value  is  like  the  level  of  a  pond;  we  can  study  it  only 
on  the  assumption  that  there  is  no  motion  of  any  kind.  Dy- 
namic normal  value  is  like  the  level  of  an  ocean  bay,  where 
the  tide  ebbs  and  flows  and  the  level  is  slowly  changing;  mar- 
ket value  is  like  the  surface  when  agitated  by  the  wind.  To 
ascertain  the  laws  of  value  we  must  not  only  study  the  forces 
that  produce  the  higgling  of  the  market,  —  that  is,  the  winds 
that  disturb  the  surface;  we  must  also  study  the  forces  which 
change  the  level  of  prices,  —  that  is,  the  strength  of  the  tidal 
current  and  the  conformation  of  the  shores;  we  must  finally 
study  the  causes  of  the  original  level  itself,  —  that  is,  the  source 
of  the  supply,  the  volume  of  the  water  and  the  depth  of  the 
bed.  For  instance,  wages  in  America  oscillate  from  season  to 
season,  they  have  changed  from  century  to  century,  and  at 
all  times  they  have  been  on  a  different  level  from  European 
wages. 

We  begin,  therefore,  with  the  study  of  market  value.     We 
must,  however,  first  understand  the  conditions  that  make  ex- 
change itself  possible. 
IS 


226  Market  Value  [§  95 


95.   The    Conditions    of   Exchange  —  The  Lavr  of   Compara- 
tive Utilities  and  Comparative  Costs 

Let  us  suppose  that  A  possesses  salt  and  B  tea,  and  that  each 
is  willing  to  trade.  All  that  is  necessary  to  an  exchange  is  that 
A's  liking  for  tea  as  compared  to  salt  should  be  different  from 
B's.  It  is  not  necessary  that  A's  preference  should  be  the 
opposite  of  B's.  Both  A  and  B  may  like  tea  more  than  salt, 
but  if  A  likes  a  pound  of  tea  four  times  as  much  as  a  pound  of 
salt,  and  B  only  twice  as  much,  they  will  be  willing  to  exchange. 
If  three  pounds  of  salt  are  given  for  one  of  tea,  A  will  be  satis- 
fied, for  he  would  have  been  willing,  if  necessary,  to  give  another 
pound  of  salt  for  the  tea;  and  B  will  be  satisfied  because  in- 
stead of  the  two  pounds  of  salt,  which  he  considers  the  equiva- 
lent of  a  pound  of  tea,  he  gets  three  pounds.  Nor  does  the 
fact  of  an  exchange  tell  us  anything  about  the  absolute  prefer- 
ences of  the  two  parties.  If  A  and  B  are  willing  to  trade  tea 
and  salt,  pound  for  pound,  it  does  not  follow  that  A  likes  tea 
more  than  B,  or  that  B  likes  salt  more  than  A.  A  may  like 
salt  more  than  B  and  yet  give  it  up,  provided  he  likes  the  tea 
much  more  than  salt,  and  at  the  same  time  likes  both  tea  and 
salt  much  more  than  B  does.  Suppose  A  gets  ten  units  of  satis- 
faction from  a  pound  of  tea  and  five  from  a  pound  of  salt,  while 
B  gets  one  unit  of  satisfaction  from  a  pound  of  tea  and  two 
from  a  pound  of  salt.  B  will  then  give  up  the  tea  because  he 
saves  one  unit,  and  A,  although  he  likes  salt  more  than  B  does, 
will  give  it  up  because  he  saves  five  units. 

The  fact  of  exchange  thus  tells  us  only  that  A's  liking  for 
salt  as  compared  with  tea  is  different  from  B's;  it  tells  us 
nothing  as  to  whether  A  likes  salt  more  than  tea,  or  whether 
A  likes  either  salt  or  tea  more  than  B.  In  technical  language, 
an  exchange  tells  us  only  that  there  is  a  disparity  in  the  mar- 
ginal utilities  of  the  articles  for  the  two  parties,  or  that  there  is 
a  difference  in  the  reciprocal  demand;  it  teUs  us  nothing  as  to 
the  marginal  utility  of  either  commodity  for  either  party.     The 


§  g6l  Rate  of  Exchange  227 

rate  of  exchange  depends  on  the  degree  of  this  disparity,  and 
the  law  of  exchange  may  be  stated  as  the  law  of  comparative 
marginal  utilities,  or  the  law  of  reciprocal  demand. 

A  and  B,  however,  had  to  secure  their  salt  and  tea.  It  cost 
them  something.  A  difference  in  reciprocal  demand  means  a 
difference  in  the  demand  as  compared  to  the  supply.  This  is 
the  same  as  saying  that  it  is  a  difference  in  the  supply  as  com- 
pared to  the  demand.  When  we  speak  of  supply  we  think  of 
marginal  cost,  just  as  when  we  speak  of  demand  we  think  of 
marginal  utility.  Exchange  may  therefore  be  explained  in 
terms  of  cost  as  well  as  in  terms  of  utility;  and  the  law  of 
exchange  may  equally  well  be  stated  as  the  law  of  comparative 
costs.  I  may  be  so  much  more  intelligent  than  my  furnace 
man  that  I  could  save  much  coal  by  tending  the  furnace  my- 
self; yet  I  prefer  to  look  after  my  business,  and  let  him  tend 
the  furnace,  because  it  pays  each  of  us  better  to  do  so.  The 
law  of  comparative  costs  and  of  reciprocal  demand  is  the  founda- 
tion, not  only  of  international  trade  as  the  older  economists 
explained,  but  of  all  exchanges,  that  is,  of  all  economic  trans- 
actions. 

96.   The  Rate  of  Exchange  —  Barter 

Having  ascertained  the  fundamental  condition  of  exchange, 
let  us  now  turn  to  the  rate  of  exchange.  Suppose  that  A  and 
B  both  like  tea  more  than  salt.  A  begins  by  offering  ten  pounds 
of  salt  for  one  of  tea,  but  really  wants  it  so  badly  that  he  would 
if  necessary  go  as  high  as  sixty  for  one.  B,  on  the  other  hand, 
is  willing  to  give  up  some  tea,  but  only  at  the  rate  of  one  pound 
of  tea  for  twenty  of  salt.  At  the  same  time  he  thinks  that 
A  needs  tea  for  more  than  he  (B)  cares  for  the  salt,  and  there- 
fore begins  by  saying  that  he  will  take  not  less  than  seventy 
pounds  of  salt  for  one  of  tea. 

It  is  plain  that  an  exchange  can  take  place  only  between 
the  limits  of  twenty  and  sixty  pounds  of  salt  for  one  of  tea. 
At  anything  under  twenty,  B  will  not  exchange;  at  anything 
over  sixty,  A  will  not  exchange.     The  lower  and  higher  offers 


2  28  Market  Value  [§  96 

originally  made  by  each  are  excluded  by  the  desire  of  each^ 
to  come  to  terms.  Only  between  the  limits  of  twenty  and 
sixty  will  an  exchange  be  profitable  to  both. 

The  question  still  remains:  what  will  be  the  exact  rate  be- 
tween these  limits?  In  pure  theory  there  must  be  a  point 
between  twenty  and  sixty  where  the  gain  of  both  in  surplus 
enjoyment  is  at  a  maximum.  The  location  of  that  point  de- 
pends on  the  comparative  desire  of  each  for  both  commodities. 
If  A  prefers  tea  to  salt  much  more  than  B  does,  the  exchange 
will  be  made  at  a  figure  close  to  sixty;  for  even  though  A 
offers  only  twenty  or  thirty  for  one,  his  anxiety  to  get  more  tea 
will  be  greater  than  B's  desire  to  get  the  salt  at  that  rate,  and 
will  lead  him  to  increase  the  offer.  With  every  increase  in 
the  rate,  A's  desire  for  more  tea  wiU  fall,  and  B's  desire  for 
more  salt  will  rise;  but  as  A's  original  desire  is  much  greater 
than  B's,  the  point  at  which  the  relative  desires  become  equal 
must  be  one  comparatively  favorable  to  B,  that  is,  near  sixty. 
If,  on  the  other  hand,  A  prefers  tea  to  salt  only  slightly  more 
than  B  does,  the  rate  will  be  nearer  twenty.  Whatever  the 
relative  preference,  there  is  a  point  which  gives  both  a  total 
maximum  benefit. 

This  is  strictly  true,  however,  only  of  divisible  commodities 
or  articles  sold  in  stocks,  where  any  unit  possesses  a  propor- 
tionate value  of  the  whole.  Where  there  is  no  stock,  or  where 
the  commodity  cannot  be  divided  without  some  loss  of  value, 
such  an  exact  point  between  the  limits  may  not  be  found. 
The  relative  desires  of  A  and  B  changed  because  of  the 
minute  alterations  in  the  supply  of  each  commodity.  But  if 
the  tea  and  salt  were  in  ten-pound  bags,  or  if  A  and  B  were 
exchanging  hens  and  pigs,  the  units  could  not  be  divided,  and 
it  might  happen  that  at  least  one  party  would  get  either  a  little 
more  or  a  little  less  than  he  anticipated. 

Even  with  divisible  commodities,  however,  the  theory  as- 
sumes that  equal  knowledge,  equal  opportunity  and  equal 
capacity  are  found  on  both  sides.     When  these  conditions  are 


§  97]  One  Seller  and  One  Buyer  229 

lacking,  as  is  usually  the  case  in  such  an  isolated  transaction, 
the  actual  rate  of  exchange  will  depend  largely  on  the  superior 
shrewdness  or  good  fortune  of  the  one  party  in  gauging  the 
strength  of  the  other.  If  A  can  conceal  his  intentions  better, 
the  rate  will  be  favorable  to  him;  if  B  can  "bluff"  better,  it 
will  be  the  reverse.  The  keener  and  more  adroit  trader  will 
make  the  greater  gain.  In  practice,  therefore,  the  rate  of 
exchange  will  usually  be  at  almost  any  point  between  twenty 
and  sixty. 

97.    One  Seller  and  One  Buyer 

Let  us  now  go  a  step  further  and  suppose  that  both  parties 
are  acquainted  with  the  use  of  money,  and  that  A  has  money 
instead  of  salt,  while  B  is  willing  to  give  up  his  tea  for  cash 
instead  of  salt.  In  other  words,  A  wants  to  buy  tea  and  B  to 
sell  it.  Instead  of  barter  we  now  have  purchase  and  sale. 
Substituting  a  cent  of  money  for  a  pound  of  salt,  A  offers  as 
before  ten  cents  (instead  of  ten  pounds  of  salt)  for  a  pound  of 
tea,  and  B  says  that  he  will  take  not  less  than  seventy  cents. 

If  the  desire  of  A  and  B  for  money  is  as  different  as  was  their 
desire  in  the  preceding  case  for  salt,  the  problem  will  be  pre- 
cisely the  same.  This  is  sometimes  true  in  actual  life.  A  dollar 
is  worth  more  to  a  poor  man  than  to  a  rich  man,  —  its  marginal 
utility  is  greater.  A  physician  will  charge  a  wealthy  patient  for 
an  operation  far  more  than  a  man  in  modest  circumstances. 
The  price  of  an  old  master  or  a  mediaeval  missal  will  often 
depend  largely  on  the  wealth  of  the  purchaser.  But  in  the 
ordinary  transactions  of  life,  where  we  deal  in  masses  of  com- 
modities, and  where  the  sum  devoted  to  the  purchase  is  only 
a  fraction  of  the  purchaser's  wealth,  this  difference  in  the  worth 
of  money  may  be  neglected.  Prices  on  the  produce  exchanges 
for  cotton  or  wheat  are  rarely  affected  by  the  fact  that  some 
of  the  dealers  are  richer  than  others.  The  great  advantage 
of  the  use  of  money  is  that  in  ordinary  transactions  its  mar- 
ginal utility  to  both  parties  may  be  deemed  the  same. 


230  Market  Value  [§  97 

The  problem  is  therefore  simplified.  The  rate  of  exchange 
was  so  arbitrary,  because  as  A  and  B  got  more  or  less  of  salt 
as  compared  with  tea,  the  marginal  utilities  of  each  commod- 
ity varied.  But  now  since  A  and  B  desire  to  buy  or  to  sell 
tea  only,  and  as  we  assume  that  the  value  of  money  remains 
constant,  the  price  that  each  is  willing  to  pay  depends  only  on 
their  relative  demand  for  tea.  In  technical  language,  the 
rate  of  exchange  is,  as  before,  conditioned  by  the  disparity  in 
the  marginal  utilities  of  the  two  commodities;  but  since  the 
disparity  due  to  the  changes  in  the  utility  of  money  to  each 
is  now  negligible,  the  total  disparity  is  less  than  before.  If, 
as  is  possible,  this  relative  demand  of  A  and  B  for  salt  in  the 
original  illustration  was  responsible  for  a  variation  of  ten  points 
in  each  case,  the  limits  within  which  a  pound  of  tea  will  now 
change  hands  are  reduced  from  the  original  figures  of  twenty 
and  sixty  (pounds  of  salt)  for  one  of  tea,  to  thirty  and  fifty 
(cents)  for  one  pound  of  tea.  That  is,  if  we  neglect  the  varia- 
tions due  to  difference  in  the  marginal  utility  of  money,  the 
price  of  a  pound  of  tea  will  be  somewhere  between  thirty  and 
fifty  cents.  Within  these  limits  it  will  still  be  arbitrary,  where 
A  and  B  are  the  only  buyer  and  seller. 

The  cases  thus  far  discussed  are  not  typical  of  ordinary  busi- 
ness transactions.  People  no  longer  barter  with  each  other, 
nor  does  it  often  happen  that  there  is  only  a  single  buyer  and 
a  single  seller.  An  example  would  be  the  agent  of  a  collector 
of  curios  meeting  a  farmer  who  is  persuaded  into  selling  an 
old  piece  of  furniture.  Ordinarily,  however,  there  will  be 
either  a  number  of  buyers  or  a  number  of  sellers,  —  and  often 
of  both  buyers  and  sellers.  In  such  cases  we  speak  of  compe- 
tition, because  sellers  and  buyers  compete  with  each  other  to 
secure  the  most  favorable  terms  for  themselves.  When  we 
use  the  term  competition  we  usually  mean  mutual  competition, 
i.  e.,  competition  on  both  sides.  In  the  case  of  one  seller  and 
several  buyers,  we  speak  of  monopoly;  we  neglect  the  com- 
petition  because  it   is  only  one-sided,  —  between   the  buyers. 


§  98]         One  Seller  and  Several  Buyers  231 

There  may  also  be  the  reverse  kind  of  one-sided  competition, 
as  when  several  sellers  deal  with  only  one  buyer.  This  is  some- 
times called  "buyer's  monopoly,"  —  an  expression  which  is 
clear  enough,  although  etymologically  not  quite  exact,  as  the 
term  monopoly  literally  implies  "one-seller"  and  not  "one- 
buyer." 

98.   One    Seller    and    Several   Buyers,    or    One   Buyer   and 
Several  Sellers  —  Monopoly 

Let  us  now  take  the  case  where  several  A's  desire  to  pur- 
chase tea  from  the  monopolist  tea-dealer.  A,  as  we  have  seen, 
will  not  give  at  the  outside  more  than  50  cents;  suppose  that 
the  limit  of  A'  is  48  cents,  of  A^  45  cents,  and  of  A^  38  cents. 
If  A^  were  the  only  buyer,  the  price  could  not  rise  above  38 
cents,  and  might  be  much  below  it.  But  now  appears  A-,  who 
is  willing  to  go  as  high  as  45  cents.  If  each  buyer  is  ready 
to  take  B's  whole  stock,  it  is  plain  that  competition  between 
A^  and  A^  will  drive  the  price  above  38  cents,  whereupon  A' 
will  fall  out.  The  rate  of  exchange  can  therefore  fluctuate 
only  between  38  cents  and  45  cents.  If  A^  now  steps  in  and 
is  ready  to  buy  the  whole  stock,  A'^  will  be  shut  out  and  the 
price  will  fluctuate  between  45  cents  and  48  cents.  Finally, 
if  A  appears,  A^  will  be  excluded  and  the  price  will  fluctuate 
between  48  cents  and  50  cents.  In  other  words,  when  we 
have  competition  between  the  buyers,  the  rate  of  exchange 
is  limited  above  by  the  highest  offer  made  by  the  buyer  to 
whom  the  rate  is  most  unfavorable  (the  50-cent  rate  of  A), 
and  below  by  the  highest  offer  of  the  buyer  next  on  the  scale 
(the  48-cent  rate  of  A').  Thus  the  arbitrariness  of  the  rate  of 
exchange  is  limited. 

There  are  two  methods  by  which  this  result  can  be  reached. 
In  an  ordinary  auction  sale,  the  monopolist  seller  asks  for  the 
lowest  offer  for  the  whole  supply;  but  even  here  there  is  often 
an  upset  price,  that  is,  a  price  below  which  the  seller  will  en- 
tertain no  bids  at  all.     That  represents  the  30-cent  linit  of  B. 


232  Market  Value  [§98 

With  each  increase  in  the  bid,  some  of  the  would-be  buyers 
fall  out,  until  finally  A^  stops  at  48  cents.  At  an  auction  A 
will  then  get  the  tea  at  just  about  48  cents;  if  it  were  an  open 
sale,  and  if  B  were  not  willing  to  sell  at  that  figure,  A  might 
go  as  high  as  50  cents.  On  the  other  hand,  when  a  municipal 
government  offers  to  sell  bonds,  each  of  the  would-be  purchasers, 
all  of  whom  must  submit  their  bids  at  the  same  time  in  writing, 
naturally  offers  the  highest  price  at  which  he  thinks  he  can 
distance  his  competitors  and  yet  make  a  profit  for  himself. 
Here  buyers  who  offer  to  take  the  entire  issue  are  often  given  the 
preference,  and  each  is  driven  to  his  maximum  limit,  not  by 
the  actual  rising  bids  of  his  predecessors,  but  by  his  fear  of  their 
competition.  This  is  sometimes  called  the  Dutch-auction  sys- 
tem, but  it  occurs  in  certain  transactions  in  the  United  States 
and  other  countries  as  well. 

What  has  been  said  is  equally  true,  mutatis  mutandis,  of  the 
case  of  one  buyer  and  several  sellers.  Suppose  that  several 
tea-planters,  B's,  desired  to  sell  their  crop  to  a  wholesale  mer- 
chant, A,  who  has  in  some  way  monopolized  the  business  of 
supplying  the  retail  dealers.  A,  as  before,  wUl  not  pay  more 
than  50  cents,  but  B'  is  willing  to  sell  at  38  cents.  Now  comes 
B^,  who  says  he  will  accept  an  offer  of  34  cents;  B^  is  evidently 
shut  out  and  the  price  will  fluctuate  between  34  and  38  cents. 
If  B^  is  ready  to  sell  at  31  cents,  B^  will  be  shut  out  and  the 
rate  will  fluctuate  between  34  and  31  cents;  if  B  finally  enters 
the  market,  B^  is  excluded,  and  the  limits  of  sale  will  be  between 
30  and  31  cents. 

Such  cases  are  much  rarer  than  the  preceding.  For  it  is 
more  difficult  in  practice  to  monopolize  the  demand  for  an 
article  than  it  is  to  monopolize  the  supply.  Yet  instances 
rill  readily  occur,  as  where  tenders  are  invited  from  several 
p'irsons  to  supply  a  definite  demand,  either  of  a  government 
office  for  articles  like  clothing  or  armor-plates,  or  of  a  private 
individual  for  the  construction  of  a  house  or  the  making  of  re- 
oairs  of  any  kind.     The  person  inviting  the  tender  is  in  this 


[§  98         One  Seller  and  Several  Buyers  233 

transaction  a  monopolist  buyer,  and  each  of  the  rival  bidders 
now  hastens  to  malie  his  lowest  offer  at  the  very  beginning  in 
order  to  forestall  his  competitor.  The  contract  goes  to  the 
lowest  bidder  for  the  whole  amount. 

In  what  has  preceded  we  have  assumed,  for  the  sake  of  sim- 
plicity, that  each  of  the  buyers  is  ready  to  take  the  whole 
amount  ofTered,  or  vice  versa,  that  each  of  the  sellers  is  in  a 
position  to  offer  the  whole  amount  demanded.  Oftentimes, 
however,  this  is  not  true.  In  the  ordinary  case  of  monopoly 
sales,  competing  buyers  are  usually  ready  to  take  only  a  part 
of  the  stock.  It  is  instructive  to  study  what  the  results  are 
under  such  conditions. 

Suppose  that  the  four  A's  desire  different  quantities  of  tea. 
A,  let  us  say,  desires  400  lbs.  and  is  willing  to  pay  up  to  50  cents 
a  pound  for  the  first  hundred  pounds  if  he  cannot  get  any 
more,  48  cents  for  the  second  hundred,  45  cents  for  the  third 
and  38  cents  for  the  fourth;  A^  desires  300  lbs.  and  is  ready  to 
pay  not  more  than  48  cents  for  the  first  hundred,  45  cents  for  the 
second  and  38  for  the  third;  A^  wishes  200  lbs.  and  will  go  to 
45  cents  for  the  first  hundred  and  2>^  cents  for  the  second;  fi- 
nally, A^  wants  100  lbs.  and  will  give  38  cents  a  pound.  Now, 
if  B  has  only  100  lbs.,  /.  e.,  if  each  of  the  buyers  bids  for  the 
whole  stock,  we  have  seen  that  A  will  force  the  price  up  to  48 
cents,  and  may  even  go  up  to  50  cents.  A  will  thus  secure  the 
entire  supply.  If,  however,  B  has  more  than  100  lbs.  to  sell, 
some  of  the  buyers  (A^)  will  not  bid  for  the  total  amount.  As 
a  consequence  both  the  price  and  the  quantities  which  each 
purchaser  secures  will  vary.  Suppose  that  B  has  300  lbs.  A 
and  A^  between  them  will  bid  the  price  up  to  45  cents  in  order 
to  exclude  A^,  and  the  price  will  vary  from  45  cents  to  48  cents. 
At  any  such  price  A  will  not  get  more  than  200  lbs.,  for  although 
he  is  willing  to  pay  up  to  48  cents  for  his  second  hundred,  he 
finds  that  A^  is  ready  to  pay  just  as  much  for  what  is  his  first 
hundred;  and  while  A  is  willing  to  give  up  to  45  cents  for  his 
third  hundred,  A^  is  ready  to  pay  as  much  for  his  second  hun- 


2  34  Market  Value  [§  99 

dred.  A  cannot  escape  the  competition  of  A^  except  as  to  loo 
lbs.  The  result  is  that  the  price  for  the  whole  300  lbs.  must  be 
the  same  to  both,  that  is,  at  some  point  between  45  cents  and 
48  cents,  and  that  A  will  get  200  lbs.  and  A^  100  lbs.  at  that 
price. 

If  B  has  600  lbs.,  it  can  be  shown  by  the  same  reasoning 
that  the  price  must  be  between  38  cents  and  45  cents,  and  that 
A  will  get  300,  A\  200,  and  A^  100  lbs.  The  price  cannot 
fall  below  38  cents,  for  otherwise  A^  would  get  some  tea,  —  a 
condition  which  all  the  others  are  interested  in  preventing, 
as  they  know  that  there  is  not  enough  to  go  around.  But 
although  A^  is  shut  out.  A-  cannot  get  more  than  100  lbs.,  be- 
cause if  there  were  any  danger  of  his  doing  so,  A^  and  A  would 
fear  to  lose  some  of  their  share  and  bid  the  price  up  above 
45  cents,  which  A-  cannot  afford.  For  the  same  reason  A^ 
cannot  get  more  than  200  lbs.,  for  A  would  then  bid  the  price 
above  45  cents,  which  A^  cannot  afford  for  his  second  hundred; 
and,  finally,  A  cannot  get  more  than  300  lbs.,  for  he  would  have 
to  exclude  A^  by  offering  more  than  45  cents,  which  A  cannot 
afford  for  his  third  hundred. 

Thus  in  all  such  cases  the  rate  of  exchange  will  vary  between 
38  cents  and  50  cents,  according  to  the  relative  demand  of 
each  of  the  buyers.  By  the  same  reasoning  it  might  be  shown 
that  where  we  have  one  buyer  and  several  sellers  the  rate 
would  vary  from  30  cents  to  38  cents.  In  each  case  of  such 
one-sided  competition  the  arbitrariness  of  the  rate  will  be 
less  than  where  there  is  no  competition  at  all. 

99.   Several  Sellers  and  Several  Buyers  —  Competition 

We  now  come  to  the  final  case,  so  generally  found  in  actual 
life,  where  there  are  at  the  same  time  several  buyers  and  several 
sellers,  that  is,  where  there  is  competition  on  both  sides.  They 
all  meet,  either  in  person  or  through  agents,  on  the  tea  ex- 
change. Each  buyer  desires  to  purchase  a  certain  quantity 
of  tea,  but  all  the  buyers  together  are  ready  to  take  more  than 


§  loo]  Conclusions  235 

is  offered,  provided  they  can  get  a  satisfactory  price;  each 
seller  wishes  to  dispose  of  a  certain  quantity,  but  all  the  sellers 
together  would  be  ready  to  sell  more  than  there  is  a  demand 
for,  provided  they  can  get  a  satisfactory  price.  In  other  words, 
each  desires  to  do  as  much  business  as  he  possibly  can  with 
profit.  Under  such  conditions  the  market  price  of  the  tea  must 
be  38  cents,  not  more  and  not  less.  There  will  be  no  variation 
at  all. 

For  if  the  price  fell  to  37  cents  some  of  the  sellers  (repre- 
sented by  B^)  could  not  afford  to  sell,  and  with  the  shortage 
in  the  suppl}'  all  the  buyers  together  could  not  get  as  much  as 
they  want;  they  would  therefore  bid  against  each  other,  in  the 
fear  of  not  getting  enough,  and  the  price  would  rise.  It  could, 
however,  not  go  above  38  cents,  for  if  it  were  driven  say  to  39 
cents,  some  of  the  buyers  (those  represented  by  A^)  could  not 
afford  to  buy.  With  the  falling  off  in  the  demand,  each  of  the 
sellers  would  fear  to  be  the  unlucky  one  who  failed  to  dispose 
of  his  stock;  the  sellers  (B's)  would  therefore  vie  with  each 
other  in  reducing  the  price  until  it  fell  to  38  cents. 

Thus  we  see  that  while  in  the  case  of  one  buyer  and  one 
seller  the  rate  of  exchange  is  arbitrary  (between  30  cents  and 
50  cents),  in  the  case  of  competition  on  either  side  the  limits 
of  variation  are  reduced  (between  30  cents  and  38  cents,  or 
38  cents  and  50  cents  respectively),  and  in  the  case  of  com- 
petition on  both  sides,  the  limits  meet,  that  is,  the  arbitrari- 
ness disappears  and  the  rate  of  exchange  is  fixed  (at  38  cents). 

100.   Conclusions 

From  the  above  analysis  follow  certain  important  conclusions: 
(i)  Under  free  competition  there  can  be  at  a  given  time 
and  place  only  a  single  price  for  the  same  commodity.  The 
price  of  tea  must  be  38  cents  to  all;  if  it  were  less  or  more, 
the  pressure  of  the  competing  buyers  or  sellers  would  at  once 
operate  to  bring  it  back  to  that  point.  The  exceptions  to  the 
rule  are  only  seeming.     It  may  happen,  for  example,  that  on 


236 


Market  Value  [§  100 


an  exciting  day  on  the  stock  exchange,  when  there  are  violent 
fluctuations  in  the  market,  the  same  securities  may  be  sold  at 
the  same  time  in  two  different  groups  at  different  prices.  Here, 
however,  there  is  no  perfect  competition;  there  are  really  two 
separate  markets,  the  members  of  which  have  no  direct  con- 
nection with  each  other.  As  soon  as  the  excitement  dies  away 
and  the  groups  of  buyers  and  sellers  coalesce,  the  market  be- 
comes a  unit,  competition  is  again  perfect  and  the  price  is  the 
same  throughout.  In  the  same  way  a  firm  may  do  both  a  retail 
and  a  wholesale  business,  and  sell  the  same  article  for  different 
prices;  but  plainly  there  are  two  separate  markets.  Again, 
some  purchasers  have  to  pay  more  because  their  credit  is  not 
good;  but  there  is  no  perfect  competition,  because  the  buyers 
are  really  offering  different  things  in  exchange.  Finally,  some 
sellers  may  ask  less  because  they  are  ignorant  of  the  market 
conditions,  or  may  grant  lower  rates  to  large  purchasers  be- 
cause the  transactions  are  secret.  In  no  instance  where  there 
is  a  perfect  competition  can  there  be  more  than  one  price  for 
the  same  thing  at  the  same  time. 

When  competition  is  absent  on  one  side,  that  is,  in  the  case  of 
monopoly,  this  principle  does  not  apply.  Since  the  object  of 
the  monopolist  is  to  make  the  greatest  possible  net  profits,  it  is 
to  his  interest  to  sell  each  increment  of  his  supply  at  the  highest 
possible  price.  If  we  refer  to  the  example  above  (p.  231),  it 
will  always  be  to  the  interest  of  the  monopolist  tea-dealer  who 
has  a  stock  of  300  lbs.  to  sell  100  lbs.  to  A  at  a  price  over  48 
cents,  and  the  other  200  lbs.  to  A  and  A^  at  a  price  between 
45  cents  and  48  cents,  rather  than  to  sell  the  300  lbs.  at  the 
lower  price.  The  monopolist  will  not  generally  be  able  to  do 
this,  for  he  may  be  selling  in  a  market  where  he  must  seek  to 
dispose  of  his  whole  stock  without  perfect  knowledge  as  to 
the  conditions  of  the  consumers.  Wherever  he  can,  however, 
he  will  make  different  prices  to  different  persons,  and  if  possible 
will  even  sell  different  increments  of  the  supply  at  different 
prices  to  the  same  person.     Thus  not  only  does  the   Standard 


§  lool  Conclusions  237 

Oil  Company  find  it  profitable  to  charge  different  prices  for 
its  oil,  but  the  makers  of  particular  brands  of  soap  or  choco- 
late, which  give  them  to  that  extent  a  monopoly,  are  in  the 
habit  of  putting  the  same  soap  or  chocolate  into  different  pack- 
ages and  selling  them  at  different  prices,  in  the  expectation 
that  different  grades  of  purchasers  will  be  attracted.  Under 
competition  this  would  be  impossible. 

(2)  In  the  case  of  competition  the  market  price  is  always 
the  one  at  which  the  greatest  number  of  exchanges  can  be 
effected.  If  the  price  fell  below  38  cents,  some  of  the  sellers 
could  not  dispose  of  their  tea;  if  the  price  rose  above  38  cents, 
some  of  the  buyers  would  be  unable  to  secure  tea.  In  either 
case  some  would  go  unsatisfied.  When  the  determination  of 
the  market  price  is  left  to  a  superior  authority,  as  on  the  Berlin 
stock  exchange,  we  have  a  good  illustration  of  the  principle. 
There  the  bids  and  offers,  in  writing,  are  so  adjusted  by  a  com- 
mittee that  although  no  one  pays  more  or  receives  less  than  he 
intended,  some  may  pay  less  or  receive  a  higher  price  for  such 
quantities  as  are  needed  to  balance  the  transaction,  with  the 
result  that  some  bids  or  offers  which  would  otherwise  have 
been  excluded  are  finally  accepted. 

In  the  case  of  monopoly  the  principle  does  not  apply.  Since 
the  monopolist  controls  the  supply,  he  may  secure  a  greater 
net  return  by  selling  a  smaller  quantity  at  higher  prices  rather 
than  a  larger  quantity  at  lower  prices.  The  exact  point  at 
which  he  can  sell  the  largest  quantity  at  the  greatest  profit 
depends  on  the  rapidity  with  which  the  scale  of  demand  in- 
creases as  the  supply  falls  off.  If  the  monopolist  is  in  posses- 
sion of  600  lbs.  of  tea,  the  entire  stock  in  the  market,  whether 
he  sells  600  lbs.  for  50  cents  or  500  lbs.  for  60  cents,  will  be 
immaterial  to  him.  But  if  he  finds  that  by  his  offering  only 
500  lbs.  the  price  will  rise  to  65  cents,  he  will  naturally  offer 
only  this  quantity,  and  destroy  the  other  100  lbs.  In  the  case 
of  competition  he  would  not  dare  to  do  this,  because  his  com- 
petitors would  continue  to  suppjy  the  market  at  approximately 


238 


Market  Value  [§  loo 


the  old  price;  and  he  would  be  compelled  to  accept  this  price 
for  his  reduced  quantity.  Had  the  Dutch  East  India  Com- 
pany not  possessed  a  monopoly,  it  would  not  have  destroyed 
a  part  of  its  stock  of  spices  in  order  to  secure  greater 
profits  from  the  sale  of  what  remained.  When  some  of  the 
misguided  Alabama  planters  burned  a  part  of  the  cotton  crop 
in  1904  in  order  to  raise  the  price  of  the  remainder,  it  was  on 
the  assumption  that  every  other  planter  would  burn  his 
proportionate  share,  —  an  assumption  as  rash  as  it  proved  to 
be  unfounded. 

(3)  If  by  demand  price  we  denote  the  price  offered  by  the 
buyers,  and  by  supply  price  the  price  asked  by  the  sellers,  the 
marginal  demand  price  is  the  lowest,  as  the  marginal  supply 
price  is  the  highest,  price  that  is  actually  accepted.  The  mar- 
ket price  must  always  be  the  price  where  the  marginal  demand 
and  marginal  supply  prices  meet.  The  market  price  is  there- 
fore in  cases  of  competition  always  the  marginal  price.  In 
the  example  given  above,  the  marginal  purchaser  is  A^;  the 
marginal  seller  is  B^.  A^'s  marginal  offer  to  purchase,  i.  e., 
his  demand  price,  is  38  cents;  B^'s  marginal  offer  to  sell,  i.  e., 
his  supply  price,  is  38  cents.  If  A^  was  originally  willing  to 
go  as  high  as  39  cents,  while  B^  was  ready  to  sell  at  38  cents, 
these  would  not  be  final  marginal  figures;  for  either  there 
would  be  an  A^  not  willing  to  go  quite  so  high  and  a  B''  de- 
manding a  little  higher  price;  or  A^  would  not  give  as  much 
as  39  cents  for  a  further  increment,  and  B^  would  not  be 
willing  to  let  a  further  increment  go  for  as  little  as  38  cents. 
There  would  inevitably  be  some  point  between  ^d>  cents  and 
39  cents  where  the  mutual  competition  of  the  A's  and  B's 
would  meet,  and  which  would  mark  the  marginal  offers  of  A^ 
and  B^  respectively. 

The  difference  between  the  actual  marlcet  price  and  the  non- 
marginal  offers  represents  the  surplus.  In  the  case  of  the  sellers 
who  get  the  money,  the  surplus  is  called  a  profit;  in  the  case 
of  the  buyers  who  get  the  tea,  the  surplus  is  a  consumer's  sur- 


§  loo]  Conclusions  239 

plus  if  they  drink  the  tea,  or  a  profit  if  they  sell  the  tea.  B^, 
who  sells  the  tea  for  38  cents,  makes  no  profit.  His  offer  to 
sell  for  38  cents  is  the  marginal  offer,  because  at  that  point  he 
ceases  to  have  any  inducement  to  exchange.  But  B'^  would 
have  been  willing  to  take  34  cents,  and  therefore  makes  4  cents 
a  pound  profit;  B^,  whose  limit  was  31  cents,  gains  7  cents; 
and  B  with  a  limit  of  30  cents  gains  8  cents.  On  the  other 
hand,  A,  who  buys  the  tea  for  38  cents,  would  have  been  willing 
to  go  to  50  cents.  If  he  drinks  the  tea,  this  difference  of  12 
cents  represents  a  surplus  satisfaction  to  him;  if  he  was  willing 
to  give  50  cents  because  he  knew  he  could  sell  it  for  that,  the 
12  cents  represent  his  profit.  A\  whose  limit  was  48  cents, 
secures  10  cents  surplus.  A-  with  a  limit  of  45  cents  gets  7 
cents  surplus,  while  A•^  whose  limit,  38  cents,  is  equal  to  the 
price,  enjoys  no  surplus  at  all. 

The  marginal  buyers  and  sellers  (those  who  fix  the  price) 
thus  neither  make  nor  lose;  there  will  be  nobody  beyond  the 
margin  because  he  would  lose;  while  all  those  within  the  mar- 
gin —  the  intramarginal  buyers  and  sellers  —  make  a  gain, 
measured  either  in  money  or  in  enjoyment.  The  gain  —  whether 
profit  or  consumer's  surplus  — -  has,  however,  no  effect  on  the 
price. 

In  the  case  of  monopoly  there  is  generally  no  marginal  price, 
because  there  is  only  one  seller  or  one  buyer  respectively.  In 
the  ordinary  case  of  one  seller  there  are  indeed  many  buyers, 
one  of  whom  makes  a  marginal  offer  or  demand  .price,  while 
the  intramarginal  buyers  gain.  But  as  the  seller  has  control 
of  the  supply,  there  is  only  one  supply  price,  —  no  higher  or 
lower  supply  prices,  and  therefore  no  marginal  supply  price. 
It  is  barely  conceivable  that  the  relative  state  of  demand  and 
supply  is  such  that  the  seller  is  compelled,  in  order  to  dispose 
of  anything  at  all,  to  reduce  his  price  to  a  figure  so  low  that 
even  the  least  anxious  purchaser  can  get  what  he  wants  at  his 
own  valuation.  In  such  a  case  the  monopolist  makes  no  gain; 
his  supply  price  would  be  the  marginal  demand  price.     But, 


240  Market  Value  [§  100 

except  in  this  almost  impossible  case,  the  monopolist  will  be  able 
to  charge  more,  and  the  market  price  will  not  be  the  marginal 
price.  Market  price  is  always  the  price  at  which  the  demand 
price  and  the  supply  price  meet  each  other;  in  all  but  the  most 
exceptional  cases  monopoly  market  price  is  not  a  marginal 
price. 


CHAPTER  XVI 
DETERMINATION  OF  NORMAL  VALUE 

101.   References 

N.  G.  Pierson,  Principles  (1902),  part  i,  chs.  i,  vii;  A.  Marshall,  Prin- 
ciples (1910),  bk.  iv,  ch.  iii,  and  bk.  v.  chs.  iv-vii;  E.  v.  Bohm-Bawerk, 
Positive  Theory  (189 1),  bk.  iv,  ch.  vii,  and  Karl  Marx  and  the  Close  of  his 
System  (trans,  bj^  MacDonald,  1898);  J.  B.  Clark,  Essentials  of  Economic 
Theory  (1907),  ch.  \ii;  F.  v.  Wieser,  Natural  Value  (1893),  bk.  v;  M. 
Pantaleoni,  Pure  Economics  (1898),  part  2,  ch.  iii;  J.  S.  Nicholson,  Prin- 
ciples (1901),  bk.  iii,  ch.  v;  J.  E.  Cairnes,  Leading  Principles  (1874),  part 
I,  ch.  iii;  T.  N.  Carver,  Distribution  (1904),  ch.  ii;  F.  A.  Fetter,  Principles 
(1915),  ch.  vii;  A.  W.  Flux,  Principles  (1904),  chs.  iv,  v;  A.  T.  Hadley,. 
Economics  (1896),  ch.  iii;  H.  Sidgwick,  Principles  (1883),  bk.  ii,  ch.  ii;  F. 
W.  Taussig,  Principles  (191 1),  chs.  xii-xvi;  H.  G.  Kittredge,  Utilization 
of  Wastes  and  By-Products  in  Twelfth  Census,  X,  725-748;  A.  C.  Whitaker, 
History  atid  Criticism  of  the  Labor  Theory  of  Value  in  English  Political 
Economy  (1904). 

102.   Normal  Demand — Elasticity  of  Demand 

In  the  discussion  of  market  value  we  studied  the  process  by 
which  the  temporary  demand  and  supply  balance  each  other. 
In  the  discussion  of  normal  value  we  must  consider  the  influ- 
ences which  affect  the  more  permanent  demand  and  supply. 
In  our  example  it  was  assumed  that  the  temporary  demand 
and  supply  were  such  that  tea  sold  for  38  cents.  The  question 
now  arises,  why  did  tea  sell  for  38  cents  rather  than  for  3  cents? 
The  study  of  normal  value  is  the  study  of  normal,  demand 
and  of  normal  supply. 

Since    the    demand   for    a    commodity    means    the    quantity 

desired  at  a  given  price,   a  change  in  the  demand  may  take 

place  without  being  caused  by  any  change  in  the  price.     When 

ostrich  feathers  went  out  of  fashion  a  few  years  ago,  the  de- 

16  241 


242  Normal  Value  [§  102 

mand  fell  off  to  such  an  extent  that  prices  went  down  and  pro- 
duction was  curtailed.  The  supply  adjusted  itself  to  the  smaller 
demand  at  the  lower  price.  The  change  in  demand  was,  in  last 
analysis,  the  cause  of  the  change  in  price. 

Ordinarily,  however,  demand  is  affected  by  the  price.  We 
speak  of  demand  being  elastic  when  a  change  of  price  pro- 
duces a  marked  alteration  of  demand,  demand  falling  or  ris- 
ing as  the  price  goes  up  or  down.  Every  commodity  has  its 
own  law  of  demand.  There  are  as  many  degrees  of  elasticity 
of  demand  as  there  are  variations  in  human  wants  and  the  abihty 
of  men  to  satisfy  these  wants.  Demand  may  be  relatively 
inelastic  or  stiff,  either  in  the  sense  of  being  constant  or  in  the 
sense  that  it  will  be  completely  destroyed  by  any  increase  of 
price. 

(i)  The  best  example  of  inelastic  demand  in  the  first  sense 
is  salt.  A  fall  in  price  will  not  induce  us  to  eat  more;  an  in- 
crease of  price  will  result  in  almost  no  falling  off  in  demand. 
Nevertheless  the  demand  is  not  completely  inelastic,  because 
if  the  price  rises  enough  the  poor  may  be  compelled  to  curtail 
its  use,  even  if  it  involves  disease  and  decimation.  Somewhat 
analogous  in  this  respect  to  necessities  are  high-priced  luxu- 
ries. The  purchasers  of  pearls  are  not  quite  so  likely  to  be 
held  back  by  a  moderate  increase  of  price  as  would  be  the 
less  well-to-do  consumers  of  cheaper  commodities.  Yet  the 
demand  for  pearls  is  relatively  inelastic  only  at  one  end  of 
the  scale;  even  a  slight  decrease  of  price  might  augment  the 
demand  considerably. 

(2)  The  other  case  of  inelastic  demand  may  be  illustrated 
by  oleomargarine.  If  the  price  were  to  rise  beyond  a  certain 
point,  the  demand  would  be  completely  destroyed,  and  it  would 
be  replaced  by  butter.  Even  here,  however,  the  demand 
is  inelastic  only  beyond  that  limit;  within  it,  a  decrease  of 
price  means  an  increase  of  demand.  With  well-nigh  every 
commodity  the  demand  will  be  annihilated  if  the  price  is  forced 
high  enough. 


§  I02]  Elasticity  of  Demand  243 

The  proper  statement,  then,  is  not  that  demand  is  quite 
inelastic,  but  that  every  commodity  has  its  own  relative  degree 
of  elasticity  of  demand.  The  demand  for  some  things  is  far 
more  expansible  than  for  others;  a  fall  in  the  price  of  cotton 
will  mean  a  greater  increase  in  demand  than  a  proportionate 
fall  in  the  price  of  books. 

While  utility  lies  at  the  foundation  of  value,  some  commod- 
ities can  be  utilized  only  in  combination  with  others.  A  bow 
is  of  no  use  without  an  arrow;  a  pen  is  worthless  without  ink. 
The  demand  for  such  complementary  goods  is  a  composite  or 
joint  demand:  we  want  the  pen  and  the  ink  together,  we  want 
neither  of  them  separately;  but  when  we  know  that  we  can 
get  the  one,  we  want  the  other.  The  demand  for  either  of 
two  complementary  goods  is  thus  an  indirect  or  derived  de- 
mand, and  the  elasticity  of  a  derived  demand  often  differs 
from  that  of  a  direct  demand. 

If  the  price  of  both  complementary  goods  rises,  the  demand 
for  each  will  normally  fall.  But  if  the  price  of  only  one  of  the 
complementary  goods  rises,  the  demand  for  it  will  not  fall  to 
the  same  extent.  If  both  ink  and  pens  rise  in  price,  more 
people  will  use  pencils.  But  if  the  price  of  ink  remains  the 
same,  the  price  of  pens  must  rise  far  higher  before  the  pur- 
chaser w^ill  be  driven  to  accept  a  substitute.  The  demand  for 
one  of  two  complementary  goods  is  more  inelastic  than  the 
demand  for  a  commodity  which  possesses  independent  utility. 
Direct  demand  is  more  elastic  than  the  derived  demand  which 
flows  from  the  existence  of  joint  demand. 

In  modern  life  the  sphere  of  joint  demand  is  continually 
growing.  Production  is  becoming  more  complex,  and  the 
demand  for  most  goods  used  in  production  depends  more  and 
more  on  the  possibility  of  combining  them  with  others.  Con- 
sider the  numberless  things  that  go  to  make  up  a  steamship. 
Some  of  them  possess  a  direct  utiHty  for  other  purposes;  but 
to  the  extent  that  their  value  largely  depends  on  the  demand 
of  shipbuilders,  most  of  them  may  be  considered  complemen- 


244  Normal  Value  [§  105 

tary  goods.  The  more  complex  our  productive  processes  and 
the  more  refined  our  methods  of  consumption,  the  greater  is  the 
sphere  of  joint  demand.  The  more  striking  also  are  the  effects 
which  changes  in  demand  for  one  commodity  produce  on  the 
demand  for  others.  The  demand  for  bicycles  affected  the 
demand  for  horses;  the  introduction  of  the  railway  revolu- 
tionized the  demand  for  coaches  and  for  country  inns.  The 
demand  for  any  commodity  is  in  one  sense  dependent  upon, 
or  derived  from,  the  demand  for  other  commodities. 

Whatever  the  nature  of  the  demand,  however,  whether  direct 
or  complementary,  whether  stiff  or  inelastic,  as  long  as  there  is 
any  permanent  demand  at  all,  there  will  be  an  effort  on  the  part 
of  society  to  fill  the  demand.  Inasmuch  as  all  value  depends  on 
the  relations  between  demand  and  supply,  it  becomes  necessary 
to  study  the  forces  which  influence  the  permanent  supply. 

103.   Normal  Supply — Cost  of  Production 

We  have  learned  above  (§  89),  that  valuable  things  may 
be  divided  into  four  classes,  namely,  human  services,  con- 
crete commodities,  relations  and  privileges,  and  a  fund  of  capital 
in  general.  It  must  be  noted,  furthermore,  that  economic 
goods  are  also  divisible  into  goods  of  which  the  supply  cannot 
be  increased,  like  favored  sites  of  land,  waterfalls,  old  pictures 
and  coins,  or  unique  examples  of  anything;  and,  secondly, 
into  reproducible  goods. 

The  discussion  of  market  value  and  the  preceding  remarks 
on  normal  demand  apply  to  all  the  above  classes.  In  treating 
of  normal  supply,  however,  it  is  advisable  to  study  first  those 
concrete  things  which  can  be  dupUcated.  The  great  mass  of 
commodities  can  be  increased  in  quantity,  and  the  progress  of 
society  depends  ultima'tely  on  this  increase.  We  shall  there- 
fore restrict  the  discussion  in  this  chapter  to  those  reprodu- 
cible commodities,  and  reserve  for  the  next  chapter  the  study 
not  only  of  those  concrete  goods  whose  quantity  is  fixed,  but 
also  of  the  other  embodiments  of  value. 


§  103]  Cost  of  Production  245 

Sometimes  a  commodity  is  picked  up  by  chance,  as  when 
we  stumble  across  a  gem  or  an  unexpected  deposit  of  gold. 
Clearly,  however,  we  cannot  depend  on  such  accidental  finds 
for  a  permanent  supply;  as  soon  as  we  search  for  them  we  are 
purposely  spending  time  and  labor  on  their  acquisition.  Since 
therefore  all  goods  whose  quantity  is  susceptible  of  increase 
are  acquired  (or,  in  technical  language,  produced)  by  efforts, 
they  cost  something  to  produce.  In  a  society  which  uses 
money  this  subjective  pain  cost  is  translated  into  a  money 
cost,  or  what  is  ordinarily  called  the  expenses  of  production. 
Hence  it  is  usually  stated  that  the  normal  supply  price  of 
commodities  —  that  is,  the  price  at  which  producers  in  the 
long  run  are  willing  to  sell  their  supply  —  depends  on  cost  of 
production. 

In  making  this  statement,  however,  we  must  be  careful  to 
define  both  branches  of  the  term  cost  of  production.  By  pro- 
duction we  do  not  mean  particular  production;  by  cost  we 
do  not  mean  individual  cost. 

(i)  Cost  of  production  does  not  necessarily  mean  the  cost 
of  producing  the  particular  commodity  in  question.  The  labor 
expended  on  a  commodity  has  no  necessary  influence  on  its 
price.  A  yard  of  cotton  cloth  may  have  cost  twenty  cents  to 
produce;  if  through  some  new  invention  the  same  cloth  can 
now  be  produced  for  ten  cents,  the  price  of  the  old  supply  wiE 
no  longer  be  twenty  cents.  It  is  evident,  then,  that  when  we 
speak  of  cost  of  production  we  mean  the  cost  of  continuous 
production  or  cost  of  reproduction.  If  cotton  cloth  can  be 
duplicated  or  continuously  produced  (/.  e.,  reproduced)  for  ten 
cents  a  yard,  the  supply  price  will  remain  ten  cents.  It  is 
only  where  the  cost  is  a  constant  cost,  that  is,  where  cost  of  pro- 
duction is  equivalent  to  cost  of  continuous  production  or  re- 
production, that  the  supply  price  depends  on  the  cost  of 
production.  When  cost  of  production  and  cost  of  reproduction 
diverge,  it  is  only  the  latter  that  affects  value. 

(2)  Secondly,  cost  of  production  does  not  mean  individual 


246  Normal  Value  [§  103 

cost.  Value,  as  we  know,  is  a  social  conceplion;  the  real  cost 
of  production  which  affects  value  is  the  socially  necessary  cost. 
The  important  point  is  not  that  a  commodity  costs  the  producer 
something,  but  that  it  saves  the  consumer  something.  It  may 
save  one  consumer  more  than  another,  but  its  value  depends 
on  what  it  saves  the  social  group  as  a  whole.  This  saving  of 
social  cost  is  what  is  meant  by  socially  necessary  cost.  I  may 
spend  much  time  on  something  which  will  have  no  sale  because 
it  does  not  suit  the  social  demand.  The  commodity  will  then 
of  course  not  be  duplicated;  there  will  be  no  cost  of  repro- 
duction. The  markets  are  full  of  such  examples  of  misdirected 
labor,  which  involve  the  producer  in  loss.  A  new  shirting,  for 
instance,  fails  to  strike  the  popular  fancy;  a  new  brand  of 
tobacco  attracts  no  notice.  If,  on  the  other  hand,  the  product 
fiUs  a  social  demand,  the  producers  wiU  adjust  their  output 
and  their  exertions  to  this  demand.  The  cost  to  the  individual 
producer  will  adjust  itself  to  the  socially  necessary  cost,  that 
is,  the  amount  which  the  purchasers  as  a  group  are  willing  to 
give  rather  than  make  the  article  themselves.  If  the  indi- 
viduals cannot  reduce  their  cost,  they  will  stop  producing;  if 
they  reduce  their  cost  below  this  point,  the  point  itself  will 
move.  Society  will  not  be  willing  to  give  more,  because  what 
the  producers  can  do,  the  rest  of  society  can,  if  necessary,  do. 
It  is  in  this  way  that  an  equivalence  is  brought  about  between 
individual  and  social  cost;  and  it  is  only  because  of  this  equiv- 
alence that  cost  of  production  may  be  said  to  influence  value. 

When  therefore  we  affirm  that  the  normal  supply  price 
depends  on  cost  of  production,  we  must  remember  that  we 
are  speaking  only  of  reproducible  goods,  and  that  the  state- 
ment is  true  only  in  the  sense,  first,  that  production  means  re- 
production, and,  secondly,  that  cost  means  socially  necessary 
cost,  —  not  pains  (or  their  money  equivalent)  taken,  but  pains 
saved.  When  individual  and  social  cost  diverge,  value  does 
not  depend  on  individual  cost  of  production;  when  they  meet, 
value  may  be  expressed  in  terms  of  either.     It  is  only  because 


§  I04]  Law  of  Marginal  Cost  247 

individual  cost  tends  to  adjust  itself  to  the  socially  necessary 
cost  that  we  can  roughly  speak  of  the  price  of  anything  de- 
pending on  its  cost  of  production. 

104.   Law  of  Marginal  or  Maximum  Cost 

The  term  cost  of  production  must  be  further  defined.  When- 
ever there  is  more  than  one  producer,  there  will  be  different 
costs  of  production.  Producers  differ  in  ability  or  in  oppor- 
tunity. While  all  similar  units  in  the  supply  sell  under  com- 
petitive conditions  at  the  same  price,  the  superior  skill  of  some 
employers  or  the  more  fortuitous  combination  of  other  causes 
enables  some  to  produce  more  cheaply  than  others.  If  the 
cheaper  producer  could  supply  the  whole  market,  he  would 
secure  a  monopoly.  But  while  all  producers  seek  to  sell  as 
much  as  they  can,  it  only  rarely  happens  that  any  one  can 
furnish  the  entire  supply.  Whenever  there  is  competition,  there 
are  different  costs  of  production. 

It  may  conceivably  happen,  indeed,  that  all  the  producers 
at  a  particular  moment  are  men  of  precisely  the  same  abilities 
and  subject  to  the  same  conditions.  In  this  possible  case  — ■ 
which  is  apt  to  be  true  only  of  newly  started  industries  —  there 
would  indeed  be  only  one  identical  cost  for  all  units  of  the  supply. 
There  could  then,  however,  not  be  any  permanent  profits  to 
all  the  producers,  because  prices  could  not  permanently  re- 
main above  the  mere  cost  of  production.  If  there  were  profits 
to  all  the  producers,  competition  would  surely  induce  one  of  them 
to  lower  the  price  in  the  hope  of  securing  larger  profits  through 
greater  sales;  or  if  he  did  not  do  this,  some  new  producer  would 
enter  the  field  and  cut  prices.  The  only  way  in  which  prices 
could  be  permanently  kept  at  the  old  level  would  be  through 
some  control  of  the  supply.  We  should,  however,  then  no 
longer  have  free  competition,  but  should  be  in  the  presence 
of  some  form  of  monopoly.  Permanent  production  at  the  same 
cost  for  all  units  of  the  supply  almost  always  involves  some 
form  of  monopoly. 


248  Normal  Value  [§  104 

since,  therefore,  there  is  in  case  of  competition  no  uniform 
cost,  the  question  arises,  when  we  speak  of  prices  depending  on 
cost  of  production,  which  cost?  It  can  manifestly  not  be  the 
lowest  cost.  If  at  any  moment  there  are  live  firms  supplying 
the  entire  market  for  cotton  goods,  at  a  cost  to  each  of  six 
seven,  eight,  nine  and  ten  cents  a  yard  respectively,  it  is  clear 
that  the  price  will  not  be  six  cents,  for  all  except  the  six-cent 
producer  would  then  lose  money  and  stop.  Nor  can  the  price 
be  fixed  by  the  average  cost  of  production,  as  is  often  carelessly 
stated.  For  if  the  price  were  the  average  cost,  that  is,  eight 
cents,  the  nine  and  ten  cent  producers  would  lose  and  withdraw 
their  capital.  As  long  as  the  demand  is  large  enough  to  keep 
all  the  producers  in  business,  the  price  must  be  ten  cents,  — 
corresponding  to  the  greatest  or  maximum  cost.  It  cannot  be 
lower  than  ten  cents,  for  otherwise  the  ten-cent  producer  would 
step  out;  it  cannot  be  higher  than  ten  cents,  because  in  their 
mutual  endeavor  to  capture  more  of  the  market  the  price  will 
be  kept  down  to  the  lowest  point  consistent  with  continuous 
production. 

This  maximum  cost  may  also  be  called  the  marginal  cost  of 
production,  because  the  ten-cent  producer  is  just  on  the  margin 
of  withdrawing.  He  neither  makes  nor  loses.  AU  the  other 
producers  —  the  intramarginal  producers  —  earn  a  profit  rep- 
resented by  the  difJerence  between  the  cost  to  them  and  the 
selling  price.  The  six-cent  producer  makes  four  cents  on  each 
yard,  the  seven-cent  producer  three  cents,  and  so  on.  But  the 
ten-cent  producer  only  covers  expenses. 

If  we  could  conceive  of  society  at  a  given  moment,  with  no 
changes  in  population  or  fashion  or  supply  of  capital  or  tech- 
nique, this  condition  would  be  permanent.  The  marginal 
producer  would  just  barely  make  both  ends  meet,  but  would 
earn  nothing  above  his  cost.  But  although  society  is  never 
permanently  in  such  a  state,  the  condition  may  at  any  given 
period  be  said  to  be  realized.  At  every  season  when  goods 
are  thrown  on  the  market  the  seasonal  supply  may  be  deemed 


§  105]  Law  of  Minimum  Cost  249 

fixed.  The  cotton  prints  that  are  sold  this  year  were  made 
months  ago.  According  to  variations  of  demand  from  day  to 
day  the  market  price  will  change,  but  the  oscillations  during 
this  particular  season  wUl  move  about  a  central  point  of  normal 
price  which,  so  far  as  the  supply  for  this  season  is  concerned, 
depends  upon  the  maxinium  cost,  that  is,  the  cost  of  producing 
the  most  expensive  increment  in  the  actual  supply.  Whatever 
the  daily  fluctuations  of  market  price  may  be,  the  normal  price 
for  this  season  will  be  ten  cents  a  yard.  At  any  given  period, 
cost  of  production  means  maximum  or  most  expensive  cost. 

105.   Law  of  Minimum  Cost 

The  normal  supply  price  just  discussed  is,  however,  not  the 
permanent  price  for  longer  periods.  Actual  business  condi- 
tions are  dynamic.  There  is  a  continual  movement  going  on 
in  the  forces  that  affect  supply.  The  cotton  prints  may  sell 
one  season  at  ten  cents,  but  next  season  the  more  efficient 
producer,  or  perhaps  some  new-comer  with  more  capital  or  with 
better  machines  or  with  the  chance  of  securing  cheaper  labor 
or  with  improved  facilities  for  marketing  the  product,  wiU 
endeavor  to  put  out  an  increased  supply  at  a  lower  cost.  This 
increase  of  supply  will  tend  to  depress  the  price,  and  although 
the  manufacturer's  percentage  of  profit  may  be  smaller  than  it 
would  have  been  at  the  old  price,  his  aggregate  profits  will  be 
enhanced  through  the  greater  volume  of  sales. 

On  the  other  hand,  his  gains  will  be  at  the  expense  of  the 
less  efficient  producer  at  the  margin.  In  every  business  there 
are  always  some  who  are  able  just  to  make  both  ends  meet. 
Their  machinery  is  antiquated,  their  capital  has  been  depleted, 
their  business  activity  and  knowledge  are  no  longer  what  they 
should  be,  and  their  former  profits,  if  there  ever  were  any,  have 
now  vanished.  They  may  continue  for  a  time  to  struggle 
along,  hoping  against  hope,  and  may  Hve  on  their  capital,  being 
content  to  bridge  over  the  next  few  years  without  profit;  or  if 
they  have  invested  heavily  in  unsalable  buildings  and  machin- 


250  Normal  Value  [§  105 

ery,  they  may  deceive  themselves  by  a  fallacious  system  of 
bookkeeping,  and  through  a  neglect  to  charge  up  the  item 
of  depreciation  of  stock  or  machinery,  may  figure  out  a  nomi- 
nal profit.  In  any  case,  however,  the  day  of  reckoning  is  sure 
to  come.  Sooner  or  later  the  producer  will  find  that  he  is  not 
making  money.  He  will  cease  producing  that  particular  com- 
modity, and  his  place  will  be  taken  by  some  more  efficient 
producer. 

AU  industrial  progress  consists  of  a  perpetual  change  at  the 
top  and  at  the  bottom  of  the  line  of  producers.  Fresh  capital 
is  continually  coming  in,  the  discouraged  are  continually  step- 
ping out. 

It  is  plain,  then,  that  if  by  normal  value  we  mean  the  value 
to  which  prices  tend  in  the  long  run  to  conform,  normal  value 
under  conditions  of  progress  moves  in  the  direction  of  cost  of 
production  under  the  most  favorable,  not  vuider  the  least  favor- 
able, conditions.  It  tends  toward  lowest  cost,  not  highest  cost. 
In  the  cotton  industry,  for  instance,  a  new  man  enters  the  field 
who  can  produce  prints  somewhat  more  cheaply.  While  not 
able  to  supply  the  entire  market,  he  can  turn  out  such  large 
quantities  that  the  price  will  fall,  let  us  say,  to  nine  cents.  He 
is  willing  to  sell  at  that  figure,  because  he  expects  to  dispose 
not  only  of  his  share  of  the  greater  sales  due  to  lower  prices, 
but  also  of  a  proportion  of  the  goods  previously  sold  by  the 
ten-cent  producer,  who  now  drops  out.  Even  if  he  could  sup- 
ply the  whole  demand,  he  will  not  reduce  the  price  to  eight 
cents,  because,  although  this  would  again  increase  his  sales, 
his  competitors  —  the  six-  and  seven-cent  producers  —  will 
also  sell  more,  and  he  will  not  be  able  to  seU  enough  more  to 
compensate  him  for  the  lower  price.  Under  such  conditions 
the  price  will  be  nine  cents,  and,  the  ten-cent  producer  having 
fallen  out,  the  nine-cent  producer  becomes  the  marginal  man. 

On  the  other  hand,  if  the  new  producer  finds  that  he  can 
produce  his  goods  at  a  lower  price  and  market  them  more 
successfully  than  his  competitors,  the  price  will  gradually  fall. 


§  io6]  Law  of  Varying  Cost  251 

With  every  decrease  in  price  the  old  marginal  producer  dis- 
appears, and  he  who  formerly  made  a  profit  now  becomes  the 
marginal  producer.  When  a  five-cent  or  a  four-cent  producer 
makes  his  appearance,  the  price  may  fall  to  six  cents,  and  the 
nine-cent,  eight-cent  and  seven-cent  producers  successively 
abandon  the  struggle,  until  the  six-cent  producer  now  becomes 
the  marginal  producer. 

Thus  it  is  that  while  the  cost  of  production  on  which  sea- 
sonal or  short-time  normal  supply  price  depends  is  greatest 
or  maximum  cost,  the  cost  of  production  which  influences 
permanent  normal  value  is  lowest  or  minimum  cost.  In  con- 
ditions of  change  the  marginal  or  maximum  cost  does  not  fix 
the  price,  but  is  fixed  by  the  price;  the  price  does  not  fall  to 
nine  cents  because  the  nine-cent  man  becomes  the  marginal 
producer,  but  the  nine-cent  man  becomes  the  marginal  pro- 
ducer because  the  price  falls  to  nine  cents.  Hence,  while 
normal  value  is  at  any  given  moment  at  the  point  of  maximum 
cost,  it  is  under  conditions  of  progress  continually  moving  in 
the  direction  of  minimum  cost. 

106.   Elasticity  of  Supply  —  The  Law  of  Varying  Cost 

Corresponding  to  the  elasticity  of  demand,  there  is  an  elas- 
ticity of  supply.  In  some  cases  where  no  additional  quantity 
^  can  be  secured  on  any  terms  the  supply  may  be  said  to  be 
I  completely  inelastic.  But  in  most  cases  the  supply  is  suscep- 
tible of  increase.  According  to  the  difficulties  involved  in 
procuring  this  new  supply  we  speak  of  the  relative  elasticity 
of  the  supply.  When  an  additional  amount  of  exertion  will 
result  in  a  proportionate  increase  of  output,  that  is,  when  double 
the  labor  will  double  the  supply,  we  speak  of  the  cost  being 
constant. 

Constant  cost,  then,  is  not  the  same  as  uniform  cost.  When 
we  say  that  a  commodity  is  produced  at  uniform  cost,  we 
mean  that  all  parts  of  the  supply  produced  at  a  given  time  cost 
the  same.     This  implies  that  there  is  only  one  producer.     For, 


252  Normal  Value  [§  ic6 

as  we  have  seen,  as  soon  as  there  are  different  producers  we 
have  a  maximum  and  a  minimum  cost.  Uniform  cost  impHes 
monopoly.  On  the  other  hand,  when  we  say  that  a  commod- 
ity is  produced  at  constant  cost,  we  mean  that  additional  quan- 
tities will  cost  the  same.  This  applies  to  competition  and  to 
monopoly  alike.  If  it  costs  the  monopohst  ten  cents  to  pro- 
duce every  yard  of  cotton,  no  matter  how  large  the  output, 
the  cost  is  both  uniform  and  constant.  If  the  ten-cent  producer 
competes  with  the  six  and  eight  cent  producers,  and  if  each  can 
double  his  output  by  the  apjilication  of  double  the  amount  of 
capital,  the  cost  is  not  uniform,  but  it  is  constant. 

In  many  cases  the  cost  of  production  is  not  constant,  be- 
cause the  supply  is  less  expansible  or  elastic.  When  each 
additional  increment  of  the  supply  costs  more  than  the  pre- 
ceding, we  speak  of  increasing  cost  or,  since  the  returns  from 
each  additional  application  of  energy  grow  smaller,  we  can 
equally  well  speak  of  diminishing  returns. 

In  one  sense  everything,  as  we  know  (§  88),  is  subject  to  the 
law  of  diminishing  returns.  While,  however,  the  law  of  dimin- 
ishing returns  or  increasing  cost  is  universal  in  the  sense  that 
it  applies  to  all  economic  goods  after  a  certain  point,  it  does 
not  necessarily  apply  before  that  point  has  been  reached.  The 
"certain  point"  is  the  point  of  full  utilization.  It  frequently 
happens  that  this  point  has  not  been  reached.  If  we  recur  to 
the  examples  on  page  213,  the  omnibus  may  run  only  half  full; 
there  may  be  only  two  trains  a  day  when  there  might  equally 
well  be  a  dozen;  a  farmer  with  a  twenty-five-acre  tract  may 
have  a  family  so  large  that  he  would  more  than  double  his 
produce  if  he  had  a  fifty-acre  farm.  In  the  case  of  the  omnibus 
an  increase  of  business  will  not  increase  the  expense  at  all;  in 
the  case  of  the  railroad  more  rolling  stock  and  employees  may 
be  needed,  but  new  bridges,  new  roadbed,  new  stations  and  new 
general  offices  may  not  be  required;  in  the  case  of  the  farmer 
more  seed  and  perhaps  more  implements  will  be  used,  but  these 
may   constitute  only   a   minor  element   of  cost.     In  all   these 


§  loyj  Law  of  Joint  Cost  253 

cases  a  doubling  of  receipts  may  not  be  attended  by  a  doubling 
of  expense;  the  expenses  will  increase,  but  not  so  fast  as  the 
income. 

Whenever  the  supply  is  more  elastic,  that  is,  whenever  double 
the  amount  of  exertion  yields  more  than  double  the  output, 
we  are  in  the  presence  of  the  law  of  increasing  returns  or  de- 
creasing cost.  When  double  the  exertion  just  doubles  the 
output,  we  have  the  law  of  constant  returns  or  constant  cost. 
Up  to  the  point  of  full  utilization  the  returns  may  at  first  grow 
faster  than  the  cost  or  exertion,  and  may  then  keep  pace  with 
it.  In  every  business  enterprise  some  expenses  grow  with  every 
increase  of  business,  but  others  remain  the  same  up  to  a  given 
point.  Such  expenses  are  called  constant  as  opposed  to  varia- 
ble expenses.  Whenever  the  investment  of  capital  is  consider- 
able, the  proportion  of  constant  to  variable  expenses  is  apt  for 
a  time  to  be  large.  But  the  time  wUl  ultimately  expire.  When 
the  railroad  traffic  becomes  very  dense,  new  tracks,  heavier 
bridges,  larger  stations  must  be  provided,  and  the  law  of  in- 
creasing returns  loses  its  efficacy.  Sooner  or  later  the  law  of 
increasing  returns  will  be  supplanted  by  that  of  constant  re- 
turns, only  itself  finally  to  give  way  to  the  fundamental  law  of 
diminishing  returns. 

At  any  given  period,  however,  an  industry  may  be  subject 
to  any  one  of  the  three  laws.  The  question  whether  a  business 
follows  the  law  of  diminishing,  constant  or  increasing  cost  is  a 
question  of  fact  depending  upon  the  possibility  of  profitably 
employing  more  labor  or  capital,  that  is,  of  successfully  extend- 
ing the  point  of  intensive  or  extensive  utilization. 

J  07.   Law  of  Joint  Cost 

Just  as  we  have  seen  that  there  is  a  joint  demand,  so  there 
is  a  joint  supply.  To  the  extent  that  supply  depends  on  cost, 
we  have  the  law  of  joint  cost.  In  many  cases  different  parts 
of  the  same  commodity  serve  different  uses  and  therefore  sell 
at  different  prices:    the  staterooms  in  a  steamer,  the  seats  in  a 


2  54  Normal  Value  [§  107 

theatre,  the  various  portions  of  an  animal  used  for  food,  appeal 
to  different  classes,  and  thus  sell  at  varying  prices.  The  nor- 
mal price  does  not  adjust  itself  to  the  cost  of  the  particular 
part,  because  there  is  no  such  separate  cost.  It  is  the  'whole, 
not  the  parts,  to  which  we  can  assign  a  cost;  and  this  cost  is 
the  joint  cost.  The  normal  price  of  all  the  parts  together 
adjusts  itself  to  the  joint  cost,  but  the  price  of  any  particular 
part  may  be  above  or  below  this  level. 

A  more  important  class  of  cases  is  represented  by  industries 
devoted  primarily  to  the  production  of  some  one  commodity, 
but  which  have  as  an  incidental  result  the  creation  of  a  by- 
product. Sometimes  this  by-product  is  only  the  refuse,  as 
in  the  case  of  the  mash  sold  by  the  whisky  distillers  or  the 
coke  sold  by  the  gas  companies.  Occasionally  the  by-product 
even  develops  into  the  chief  product.  The  refuse  of  to-day 
becomes  the  principal  source  of  profit  of  to-morrow.  There  is 
nothing  more  fascinating  in  the  annals  of  science  or  more  im- 
portant in  the  progress  of  wealth  than  the  story  of  the  modern 
utilization  of  wastes  and  by-products.  This  story,  in  its  appli- 
cation to  the  United  States  during  the  decade  1890-1900,  has 
been  told  by  Mr.  Kittredge  in  the  twelfth  census. 

Whenever  a  business  produces  more  than  one  kind  of  com- 
modity, we  have  something  analogous  to  by-products.  One  of 
the  greatest  difiiculties  in  modern  enterprise  is  for  the  pro- 
ducer to  assign  to  each  unit  or  class  of  his  output  its  propor- 
tionate share  in  the  joint  cost.  In  the  case  of  railway  charges 
this  difficulty  is  at  its  maximum.  In  such  cases  the  price  of 
the  individual  product  may  bear  little  relation  to  its  own  cost, 
although  the  price  of  all  the  products  together  is  fixed  by  joint 
cost.  The  railway  charges  more  for  the  transport  of  a  given 
value  of  silk  than  for  that  of  an  equal  value  of  coal,  although 
the  cost  is  far  less.  Price  here  is  fixed  not  by  cost  of  produc- 
tion or  cost  of  service,  but  by  value  of  service.  The  silk  is  so 
much  more  expensive  than  coal  that  it  can  afford  to  pay  a 
higher  charge.     If  the  same  price  were  charged  for  coal  as  for 


§  io8]         Normal  Demand  and  Supply        255 

silk,  coal  could  not  be  transported  at  all,  as  the  price  would 
be  prohibitive;  and  as  long  as  the  charge  for  coal  is  higher 
than  the  mere  hauUng  expenses,  the  charge  for  silk  is  lower 
than  it  would  otherwise  be  (see  §  237).  The  principle  of  value 
of  service  is  only  another  way  of  stating  the  law  of  marginal 
utihty,  and  it  shows  clearly  that  cost  of  production  in  itself 
is  not  the  ultimate  regulator  of  value.  In  the  same  way,  when 
domestic  manufacturers  regularly  dispose  of  a  portion  of  their 
surplus  output  by  "dumping"  it  abroad  at  prices  far  lower 
than  at  home,  it  does  not  always  follow  that  the  lower  foreign 
prices  make  the  domestic  price  exorbitant.  For  the  continu- 
ous foreign  sales  at  the  lower  price  may  be  the  chief  means  of 
keeping  the  factory  going,  and  may  thus  make  the  domestic  price 
lower  than  it  would  be  if  the  producer  had  to  charge  up  to 
his  domestic  goods  the  total  expenses  of  a  production  which 
would  otherwise  be  unremunerative.  Cost  of  production  is 
coming  more  and  more  to  mean  joint  cost;  the  price  of  a  given 
product  may  bear  only  a  remote  relation  to  its  individual  cost 
of  production. 

108.   Equilibrium  of  Normal  Demand  and  Normal 
Supply 

In  the  preceding  sections  we  have  several  times  spoken  of 
normal  value  depending  on  cost  of  production.  In  reality  it 
is  only  normal  supply  price  that  is  directly  related  to  cost  of 
production,  while  normal  demand  price  depends  on  the  strength 
of  the  eflfective  demand.  It  remains,  then,  to  consider  the 
mutual  influence  of  normal  demand  and  normal  supply. 

While  the  existence  of  a  demand  is  the  fundamental  cause 
of  value,  the  influence  of  supply  shows  itself  in  the  fact  that 
the  tendency  of  normal  value  is  to  adjust  itself  to  the  cost  of 
production,  as  we  have  explained  the  term.  A  change  in  the 
normal  demand  for  reproducible  goods  means  a  change  in  the 
normal  supply;  but  whether  it  means  a  change  in  normal 
value  depends  on  the  law  of  cost.     If  the  demand  for  a  com- 


256  Normal  Value  [§  109 

modity  increases  greatly,  the  permanent  output  will  be  larger. 
If  the  industry  is  subject  to  the  law  of  constant  return,  the  price 
will  not  change,  because  the  larger  supply  and  the  larger  de- 
mand will  still  balance  each  other  at  the  old  price.  But  if  the 
industry  is  subject  to  the  law  of  increasing  return,  where  a  larger 
output  involves  a  relatively  smaller  cost,  the  result  will  be  that 
the  producers  will  be  able  to  throw  on  the  market  more  than 
is  needed,  and  the  influence  of  this  augmented  supply  will 
reduce  the  price,  until  there  is  now  a  new  and  permanent  equi- 
librium of  demand  and  supply  at  the  lower  price. 

Since  diminution  of  cost  of  production  is  attended  by  lower 
prices  and  larger  output,  the  influence  which  seems  to  affect 
normal  value  is  the  change  in  cost  of  production. 

In  truth,  however,  demand  is  a  factor  of  at  least  equal  im- 
portance in  fixing  normal  as  well  as  market  value.  Unless  the 
producers  can  dispose  of  their  enlarged  output,  they  will 
have  no  inducement  to  continue.  If  the  defnand  cannot  be 
changed,  the  price  cannot.  But  if  the  demand  can  be  stim- 
lated  by  the  lower  price,  the  supply  wiU  be  increased  until 
there  is  a  permanent  supply  at  a  fixed  cost  to  satisfy  the  per- 
manent demand.  If  the  supply  changes  owing  to  an  altera- 
tion in  cost,  there  can  be  a  permanent  supply  at  this  new  cost 
only  if  there  is  a  new  permanent  demand.  In  every  case 
there  can  be  a  normal  price  only  if  there  is  an  equilibrium 
between  the  normal  demand  and  the  normal  supply.  So 
that  when  we  say  that  normal  price  is  fixed  by  the  cost  of 
production,  we  reaUy  mean  that  it  is  fixed  at  the  cost  of  pro- 
duction. Only  in  this  sense  can  we  speak  of  normal  value  de- 
pending at  any  given  moment  on  maximum  cost,  or  tending  in 
the  long  run  toward  minimum  cost,  or  being  influenced  in  parti- 
cular cases  by  joint  cost. 

109.  Influence  of  Normal  Price  upon  Market  Price 

It  is  therefore  inexact  to  say  that  market  price  depends  on 
demand  and  supply,   while  normal  price  depends  on  cost  of 


§  109)  Normal  and  Market  Price  257 

production,  if  we  mean  by  this  that  the  two  statements  are 
opposites.  All  price  depends  on  demand  and  supply,  but  in 
the  case  of  reproducible  goods  the  permanent  equilibrium 
between  demand  and  supply  tends  to  adjust  itself  to  the 
cost  of  production.  The  rapidity  with  which  this  adjust- 
ment takes  place  depends  on  the  relative  changes  that  oc- 
cur in  demand  and  supply.  If  the  stock  of  cotton  prints 
produced  at  a  cost  of  twenty  cents  a  yard  is  large,  and  if  the 
introduction  of  the  newer  ten-cent  prints  of  the  same  quality 
is  slow,  the  price  will  not  at  once  fall  to  ten  cents.  4  There 
will  be  a  tendency  for  the  price  to  adjust  itself  to  the  new 
cost,  and  the  greater  the  relative  supply  of  the  new  cloth,  the 
more  quickly  will  the  price  faU.  As  soon  as  purchasers  know 
that  they  can  get  the  same  goods  cheaper  by  waiting  a  short 
time,  only  those  who  cannot  aflford  to  wait  will  be  willing  to 
pay  more;  and  it  is  their  demand  which  for  the  time  prevents 
the  subsidence  of  the  price  to  the  new  cost  level.  When 
the  new  level  is  reached  no  further  change  takes  place,  the 
conditions  will  be  static  and  the  normal  price  permanent. 

If,  on  the  other  hand,  the  cost  of  cloth  continuously  falls 
owing  to  the  introduction  of  successive  improvements,  the 
normal  price  wiU  itself  be  changing.  The  market  price  will 
move  in  the  direction  of  the  new  cost  or  normal  price,  but  the 
fall  in  cost  may  be  so  rapid,  and  the  influence  of  the  old 
stocks  so  great,  that  the  actual  market  price  may  not  at  any 
moment  quite  reach  the  normal  price.  There  will  be  a  per- 
petual chase,  but  no  reaching  of  the  goal  of  equivalence 
between  the  market  and  the  normal  price.  There  will  be  no 
permanent  equilibrium,  because  there  will  be  a  continual 
change  in  the  forces  affecting  the  supply  and  the  demand. 
Under  dynamic  conditions  the  normal  price  of  commodi- 
ties may  never  emerge,  but  its  influence  is  none  the  less 
marked. 


17 


258  Normal  Value  [§  no 

110.  Normal  Monopoly  Value 

The  foregoing  discussion  has  proceeded  on  the  assumption 
of  competitive  conditions.  If  by  monopoly  we  mean  the  usual 
case  of  sellers'  monopoly,  the  difference  between  monopoly 
and  competition  lies  entirely  on  the  side  of  supply.  Unless 
there  is  a  change  in  price,  permanent  demand  will  not  ordi- 
narily change  simply  because  competitors  are  supplanted  by 
a  monopolist.  But  the  conditions  affecting  permanent  supply 
are  at  once  altered  by  such  a  transition. 

In  the  first  place,  monopoly  supply  price  is  not  necessarily 
a  unitary  or  single  price.  The  monopolist  may  make  great 
profits  by  selling  different  parts  of  the  supply  of  the  same 
commodity  at  different  prices.  The  principle  here,  however, 
is  precisely  the  same  as  in  the  case  of  monopoly  market  price, 
which  has  been  mentioned  above  (p.  239).  There  may  not 
be  one  normal   price,  but  several. 

Secondly,  marginal  cost  has  no  influence  on  price.  It  may 
indeed  happen  that  the  monopolist  controls  several  factories 
which  work  under  different  advantages  so  that  technically  there 
may  be  differences  in  their  expense  of  production.  The  point, 
however,  is  that  no  force  exists  tending  to  fix  the  price  at  the 
point  of  greatest  cost.  One  cotton  factory  in  the  trust  may 
produce  prints  at  five  cents,  another  at  ten;  in  the  absence  of 
competition  there  is  no  reason  why  the  trust  should  sell  all  the 
goods  at  ten  cents. 

If  monopoly  price  is  not  influenced  by  marginal  cost,  is  it 
affected  by  cost  at  all?  Assuredly,  but  in  a  more  indirect 
way  than  competitive  price.  Monopoly  price  is  always  at 
the  point  of  maximum  monopoly  revenue.  The  monopoUst, 
like  every  one  else,  wants  to  sell  the  greatest  amount  at  the 
highest  price;  the  monopolist,  however,  controls  the  supply. 
Since  increased  supply  ordinarily  means  lower  price,  he  will 
experiment  until  he  finds  the  point  of  greatest  net  returns. 
The  influence  of  demand  over  which  he  has  no  control  is  as 


no]  Normal  Monopoly  Value 


259 


potent  as  in.  competition;  the  law  of  substitution  works  liere 
as  there.  If  by  reducing  prices  one-half  he  doubles  his  sales, 
the  gross  receipts  will  be  the  same  as  before;  if  he  cannot 
double  his  sales,  the  gross  receipts  will  fall  off;  if  he  more 
than  doubles  them,  his  gross  receipts  will  increase.  Thus  the 
elasticity  of  demand  is  of  paramount  importance. 

Since  the  supply,  however,  costs  something  to  produce,  his 
net  profits  will  depend  on  the  surplus  of  gross  receipts  over 
cost.  This  surplus  will  vary  not  only  with  the  elasticity  of  de- 
mand, but  also  with  the  elasticity  of  supply.  In  other  words, 
if  the  industry  is  subject  to  the  law  of  constant  cost,  the 
maximum  monopoly  revenue  will  be  reached  at  an  easily  ascer- 
tained price.  If  he  charges  less,  he  would  sell  more,  but  not 
enough  more,  to  compensate  him  at  the  lower  price  for  the 
total  cost  of  the  increased  output;  his  gross  receipts  would  not 
rise  as  fast  as  his  aggregate  cost.  On  the  other  hand,  if  he 
charged  more,  the  sales  would  fall  off  so  quickly  that  the 
decrease  in  his  gross  receipts  would  not  be  offset  by  the  lower 
aggregate  cost  of  the  entire  output. 

If,  however,  the  industry  is  subject  to  the  law  of  increasing 
cost  (diminishing  returns),  the  maximum  monopoly  revenue 
wiU  be  reached  at  a  higher  price;  if  it  is  subject  to  the  law  of 
decreasing  cost  (increasing  returns),  it  will  be  reached  at  a 
lower  price.  Suppose  that  the  demand  is  such  that  the 
price  falls  off  regularly  with  the  increase  of  output.  Then 
according  to  the  law  of  constant  cost  we  should  have  a  table 
like  this: 


Units  Sold 

A  Price  per 
*     Unit 

Grrss 
Receipts 

Cost  per 
Unit 

Total  Cost 

Net 
Receipts 

Cents. 

Cents. 

- 

500 

30 

$150 

10 

$50 

$100 

1000 

-5 

250 

10 

100 

150 

20CO 

20 

4CO 

10 

200 

200 

3000 

15 

450 

ID 

300 

150 

4000 

10 

4CO 

ID 

400 

~ 

26o 


Normal  Value 


[§  no 


Thus  the  monopohst  will  make  the  largest  profits  by  putting 
the  price  at  20  cents  and  by  selling  2,000  units.  But  if  the 
law  of  increasing  cost  applies,  according  to  the  figures  in  the 
fourth  column,  it  will  pay  him  to  put  the  price  at  25  cents  and 
to  sell  only  1,000  units.     For: 


Units  Sold 

Price  per 

Unit 

Gross 
Receipts 

Cost  per 
Unit 

Total  Cost 

Net 
Receipts 

500 
1000 
2000 
3000 
4000 

Cents. 
30 

20 

IS 
10 

$150 
250 
400 
450 
400 

Cents. 
10 

12 

14 
16 

iS 

$50 
120 
2S0 
480 
720 

$100 

120 

-30 
-320 

1 

On  the  other  hand,  if  the  law  of  decreasing  cost  applies,  he 
will  find  it  to  his  interest  to  charge  only  15  cents  and  to  sell 
3,000  units.     For: 


Units  Sold 

Price  per 
Unit 

Gross 
Receipts 

Cost  per 
Unit 

Total  Cost 

Net 
Receipts 

500 
1000 
2000 
3000 
4000 

Cents. 
30 
25 
20 

15 

ID 

^150 
250 
400 

400 

Cents. 
10 

8 

6 

4 

2 

$50 

80 

120 

120 

So 

^ICO 
170 
280 

320 

In  every  case,   as  we  see,   there  is  a  definite  maximum  mo- 
nopoly revenue. 

Monopoly  price  is  therefore  influenced  by  cost*  of  produc- 
tion, but  in  a  different  way  from  competitive  price.  Whether 
it  is  higher  than  competitive  price  depends  again  on  cost. 
Ordinarily  it  will  be  higher,  because  competitive  price  is  cost 
price  (i.  e.  marginal  cost  price),  while  monopoly  price  is  above 
cost  price.  Where  a  monopoly,  however,  is  created  by  former 
competitors  to  avoid  some  of  the  wastes  of  competition,  the 


§  no]  Normal  Monopoly  Value  261 

cost  may  be  reduced  so  materially  that  it  will  be  profitable  for 
the  monopolist  to  sell  a  largely  increased  supply  at  a  lower 
price.  In  such  a  case  monopoly  price  may  be  lower  than 
competitive  price. 

In  some  cases,  again,  monopoly  price  may  be  only  very 
slightly  above  competitive  price.  It  frequently  happens  that 
what  seems  to  be  monopoly  is  really  subject  to  potential  com- 
petition. As  long  as  the  monopolist  is  content  to  charge  a 
price  low  enough  to  give  only  moderate  profits,  he  may  retain 
control  of  the  output.  But  if  he  raises  the  price  to  an  exces- 
sive point  he  may  either  tempt  other  producers  into  the  field 
or  lead  the  consumer  to  choose  some  substitute.  This  latent 
or  potential  competition  is  a  factor  to  be  reckoned  with  in  all 
cases  where  the  monopohst  is  not  safely  intrenched  by  some 
legal  or  permanent  economic  advantage. 

Since  monopoly  profits  depend  partly  on  cost,  the  intelligent 
monopolist  will  strive  to  avail  himself  of  the  newest  processes 
to  reduce  cost.  Provided  that  demand  is  expansible  he  will 
seek  to  reduce  price  as  long  as  gross  receipts  increase  faster 
than  aggregate  cost;  the  greater  the  reduction  of  cost  per 
unit,  the  more  probable  will  this  result  be.  Thus  under  favor- 
able conditions  monopoly  price  tends  to  fall,  even  though  at 
any  time  it  may  be  above  competitive  price.  The  price  of 
oil  charged  by  the  Standard  Oil  Company,  for  instance,  has  on 
the  whole  fallen,  even  though  the  fall  in  price  has  not  kept 
pace  with  the  still  greater  fall  in  the  price  of  the  crude  petro- 
leum. But  where  the  demand  is  not  so  expansible  as  in  the 
case  of  municipal  street  railways  or  the  gas  supply,  or  where 
the  monopolist  pursues  a  short-sighted  policy,  the  gap  between 
monopoly  and  competitive  price  widens. 


CHAPTER  XVII 

THE  GENERAL  LAW  OF  VALUE 

111.   References 

J.  B.  Clark,  Distribution  of  Wealth  (1899),  chs.  xvii,  xxv,  xxvi;  F.  A. 
Fetter,  Principles  (i9i5),ch.xxxix;  A.  Mdishall,  Principles  (i9io),bk.v, 
ch.  xiv;  F.  v.  Wieser,  Natural  Value  (1893),  bk.  iii,  ch.  viii;  H.  R. 
Seager,  Principles  (1913),  chs.  xvii,  xviii;  E.  S.  Meade,  Trust  Finance 
(1903),  chs.  xvi,  xvii;  E.  R.  A.  SeUgman,  Social  Aspects  of  Economic 
Law,  Presidential  Address  in  Am.  Econ.  Assoc.  Publications,  3d  series, 
no.  I  (1904);  H.  J.  Davenport,  Value  and  Distribution  (1908),  ch.  xxvii; 
H.  Floy,  Valuation  of  Public  Utility  Properties  (1912). 

112.   Value  and  Cost  of  Production 

In  the  preceding  chapter  -wq  have  dealt  with  the  value  of 
reproducible  goods.  Value,  however,  attaches  also  to  non- 
reproducible  concrete  goods  as  well  as  to  relations  and  privi- 
leges, to  human  services  and  to  a  fund  of  capital.  How  far  is 
the  value  of  these  related  to  the  cost  of  production? 

It  is  clear  that  in  the  case  of  concrete  non-reproducible 
goods  value  stands  in  no  assignable  relation  to  cost  of  produc- 
tion. The  most  prominent  example  is  land.  Land  is  not  the 
result  of  production.  To  be  sure,  if  a  piece  of  virgin  land  lies 
idle  and  a  town  springs  up  around  it,  it  will  soon  acquire  an 
increased  value;  yet  neither  the  land  not  any  of  its  qualities 
has  been  produced  by  human  agency.  Efforts  may  indeed  be 
expended  on  the  soil,  and  in  that  sense  some  of  its  qualities 
might  be  deemed  to  be  in  part  the  result  of  production,  but 
even  here  its  value  stands  in  no  relation  to  the  efforts  of  the 
individual.  Again,  take  a  piece  of  old  sculpture  or  furniture. 
It  cannot  be  reproduced;  it  may  sell  for  a  thousand  times  the 
original  cost.  Finally,  consider  two  equally  good  pictures  by  a 
great  painter  but  finished,  the  one  before  and  the  other  after 

262 


§  112]  Cost  of  Production  263 

his  attainment  of  renown.  The  difference  in  their  value  can- 
not be  explained  by  any  difference  in  cost  of  production.  In 
short,  the  value  of  concrete  non-reproducible  goods  is  neither 
fixed  nor  measured  by  cost  of  production,  either  because  they 
have  never  been  produced  at  aU  by  human  agency,  or  because 
they  cannot  be  reproduced,  or  because  there  is  no  assignable 
relation  between  the  effort  of  the  producer  and  the  present 
price  of  the  product.  Whether  these  goods  be  rented  or  sold, 
their  rental  as  well  as  their  capital  value  does  not  depend  on 
cost  of  production. 

The  value  of  that  class  of  economic  goods  known  as  rela- 
tions and  privileges  likewise  stands  in  no  direct  relation  to 
cost  of  production.  Privileges  and  relations  vary  as  much  in 
character  and  value  as  any  other  kind  of  economic  goods. 
They  may  represent  only  a  single  use,  like  a  put  or  call  on 
the  stock  exchange,  or  a  continuous  series  of  uses,  like  a  per- 
petual franchise  of  a  corporation.  When  they  are  capitalized, 
their  value,  like  that  of  all  other  goods,  is  affected  by  the  dura- 
bility and  certainty  of  enjoyment.  A  permanent  franchise  of 
a  railway  differs  from  the  limited  privilege  of  a  patent;  but  in 
the  one  case  as  in  the  other  the  durability  and  certainty  of  the 
use  are  independent. of  the  personality  of  the  possessor.  With 
the  good-will  of  a  business,  however,  the  continuance  of  profit- 
able relations  is  often  so  largely  conditioned  by  the  business 
capacity  of  the  temporary  possessor  that  there  is  less  difference 
between  capital  and  rental  value  than  in  the  case  of  a  more 
permanent  or  a  perpetual  privilege.  In  some  instances  the 
trade-mark  is  the  chief  asset  of  a  business.  The  president  of 
the  American  Chicle  Company  recently  testified  that  the  con- 
sumers of  chewing  gum  had  become  so  accustomed  to  certain 
weU-advertised  brands  that  the  company  was  able  to  pay  divi- 
dends on  a  capitalization  nine  times  the  amount  of  tangible 
assets.  Over  eighty-eight  per  cent  of  the  value  of  the  property 
was  due  to  the  trade-mark.^ 

^  U.  S.  Industrial  Commission,  Final  Report,  §  612. 


264  General  Law  of  Value  [§  113 

Whether  privileges  are  durable  or  ephemeral,  it  is  clear  that 
their  value  —  whether  rental  or  capital  value  —  does  not  de- 
pend upon  any  cost  of  production.  The  good-will  of  a 
business  may  indeed  in  one  sense  be  deemed  the  result  of 
laborious  exertion,  but  the  value  of  the  good-will  does  not 
stand  in  any  assignable  relation  to  the  exertion.  It  may  exist 
to-day  and  disappear  to-morrow,  without  any  visible  change 
in  the  proprietor.  Most  franchises  and  privileges,  moreover, 
are  not  the  result  of  any  one's  exertion;  they  are  the  conse- 
quences of  intricate  social  relations,  and  consist  of  the  opportu- 
nity of  turning  these  relations  to  profit.  Take  even  so  simple  a 
case  as  that  of  a  news-stand  in  a  city.  The  owner  often  rents 
out  the  privilege  of  serving  newspapers  to  a  list  of  customers, 
and  when  the  stand  is  sold  outright  the  chief  constituent  in 
the  price  is  the  value  of  the  "route,"  —  the  capitalization  of 
the  income  from  the  privilege  of  serving  customers.  Yet  this 
route  may  have  cost  the  original  owner  nothing  to  acquire; 
as  the  street  was  built  up,  the  route  increased  in  value,  as  it 
were  automatically.  So  also  the  franchise  of  a  railway,  the 
circulation  of  a  country  newspaper,  the  selling  value  of  a  gas 
or  water  company  grows  with  the  mere  process  of  time  and  the 
increase  of  population.  The  social  relations  which  form  the 
basis  of  their  activity  are  not  produced  by  any  individual; 
the  privileges  of  utilizing  these  relations  have  no  cost  of  pro- 
duction.    Yet  they  have  a  very  decided  value. 

It  is  not  necessary  to  illustrate  further.  All  these  things  — 
relations,  privileges  and  non-reproducible  concrete  goods  — 
are  daily  bought  and  sold  in  the  market-place,  and  yet  their 
valu§  does  not  directly  depend  on  their  cost  of  production  and 
cannot  be  measured  by  it.  Since  cost  of  production  cannot  be 
the  general  law  of  value,  what  is  that  ultimate  law? 

113.   Value  and  Efficiency. 

We  have  learned  that  value  is  at  bottom  the  expression  of 
marginal  utility.     It  follows  that  all  prices  must  be  studied 


§  113]  Value  and  Efficiency  265 

from  the  point  of  view  of  marginal  utility,  that  is,  of  the  power 
of  marginal  increments  of  supply  to  satisfy  the  marginal  in- 
crements of  demand.  This  is  only  another  way  of  stating 
that  the  fundamental  explanation  of  value  is  marginal  effi- 
ciency, or  the  capacity  of  marginal  units  to  satisfy  marginal 
wants. 

(i)  In  the  case  of  concrete  non-reproducible  goods  this  is 
patent.  When  a  farmer  hires  a  piece  of  land,  the  rent  which 
he  pays  depends  on  the  produce  of  that  special  grade  of  land 
as  compared  with  others.  When  a  speculative  builder  secures 
a  site,  the  price  of  the  lot  is  fixed  by  its  capacity,  from  the 
point  of  view  of  eligibility,  to  satisfy  the  wants  of  a  particular 
class  of  tenants.  Whether  he  pays  a  capitalized  purchase 
price  or  an  annual  rent,  as  in  England  and  some  parts  of 
America,  is  immaterial.  Again,  the  value  of  a  painting,  old 
or  new,  is  regulated  by  its  capacity  to  appeal  to  the  taste  of  a 
particular  class  of  amateurs,  that  is,  by  its  marginal  efficiency 
in  contributing  to  the  satisfaction  of  certain  wants.  Cost  of 
production,  as  we  have  learned,  plays  no  direct  role  in  the 
determination  of  value  of  this  entire  class  of  cases.  Not  cost, 
but  efficiency,  is  the  explanation. 

(2)  With  that  class  of  economic  goods  that  we  have  called 
relations  or  privileges  the  situation  is  analogous.  The  rental 
of  the  news-stand,  the  franchise  of  the  gas  company,  a  patent 
or  copyright,  a  new  brand  of  goods  or  a  trade-mark,  —  the 
value  of  all  such  intangible  relations  depends  on  the  extent  to 
which  they  contribute  to  the  earnings  of  the  business.  Their 
value  is  conditioned  by  the  marginal  efficiency  of  the  services 
which  they  render.  The  cost  may  have  been  zero;  —  not 
cost,  but  efficiency,  affords  the  clue. 

(3)  The  great  mass  of  concrete  reproducible  goods  has 
been  discussed  in  the  preceding  chapter.  Here  indeed  cost 
of  production  seems  to  be  of  commanding  importance.  As 
we  have  learned,  however,  it  is  not  so  much  that  prices  of 
such  goods  are  fi.xed  by  the  cost  of  production  as  that  they 


266  General  Law  of  Value  [§  113 

are  fixed  at  the  cost  of  production.  The  value  of  all  produc- 
tion goods  is  derived  from  the  value  of  their  products,  —  the 
consumption  goods;  the  value  of  the  raw  material  is  derived 
from  the  value  of  the  finished  product.  The  price  of  pig  iron 
depends  on  the  price  of  the  nails,  billets  and  all  other  iron 
products  into  which  pig  iron  enters  as  a  constituent.  If  the 
demand  for  these  products  should  diminish,  the  price  of  pig 
iron  would  fall,  those  who  produced  at  a  higher  cost  would 
stop  producing,  and  the  new  (marginal)  cost  of  production 
would  adjust  itself  to  the  new  price.  There  is  an  abundance 
of  silver  below  the  surface  that  is  not  mined  because  it  will 
not  pay;  if  the  marginal  efficiency  or  value  of  silver  should 
rise,  these  more  expensive  grades  would  at  once  be  marketed 
and  the  new  marginal  cost  of  production  would  adjust  itself  to 
the  price.  The  price  would  not  rise  because  the  cost  increased; 
but  the  higher  price  would  be  fixed  at  the  higher  cost  because 
that  would  now  be  the  new  point  of  marginal  efficiency. 

(4)  We  come,  finally,  to  the  value  of  human  services  and  of 
the  fund  of  capital.  Wages  and  interest  are  of  such  signal 
importance  in  the  distribution  of  the  social  income  that  their 
fuller  discussion  will  be  reserved  until  later.  It  may,  however, 
be  said  provisionally  that  they,  like  everything  else,  derive 
their  value  from  the  marginal  increments  of  the  services  which 
they  render,  that  is,  from  their  marginal  efficiency.  To  the 
extent  that  labor  is  productively  employed  the  rate  of  wages  in 
each  grade  of  labor  must  in  general  tend  to  equal  the  mar- 
ginal efficiency  of  the  labor,  that  is,  its  contribution  to  the 
product  at  the  margin' of  employment.  In  the  same  way  the 
rate  of  interest  will  tend  to  equal  the  marginal  efficiency  of 
capital,  that  is,  the  actual  contribution  of  the  marginal  incre- 
ment of  capital  employed.  How  these  marginal  contributions 
of  both  labor  and  capital  are  to  be  measured,  and  how  the 
changes  of  actual  life  move  the  margin  of  this  efficiency  up  or 
down,  remain  to  be  considered  later. 

Labor   and    capital,    however,    are    susceptible   of   increase. 


§  113]  Value  and  Efficiency  267 

Will  they  then  not  increase  up  to  the  point  of  continuous  cost 
of  reproduction,  and  can  it  not  be  said  that  their  value  is  fixed 
by  the  cost  of  production?  In  the  case  of  labor,  if  by  cost  of 
production  we  mean  the  cost  of  the  physical  reproduction  of 
the  laborers,  we  encounter  the  ditificulty  that  human  beings  are 
not  reproduced  for  economic  reasons.  But  even  if  we  restrict 
our  attention  to  the  economic  causes  of  the  growth  of  popula- 
tion, and  aver  that  the  future  supply  of  laborers  depends  on  the 
cost  of  reproduction,  that  is,  of  bringing  them  into  the  world 
and  nourishing  them  until  they  become  self-supporting,  the 
obvious  rejoinder  is  that  this  expense  is  a  result  rather  than  a 
cause,  and  that  what  the  laborer  can  afford  to  spend  on  his 
family  will  depend  upon  the  wages  which  he  receives.  It  is 
as  in  the  case  of  reproducible  commodities,  where  value  is 
fixed  at  the  cost  of  production,  but  not  by  the  cost  of  produc- 
tion. The  contribution  or  efficiency  is  the  positive  cause;  the 
cost  of  production  adjusts  itself  to  this. 

In  the  same  way,  to  speak  of  the  cost  of  production  of  the 
mass  of  capital  is  ambiguous.  Capital  as  a  fund  or  embodi- 
ment of  value  has  in  one  sense  no  assignable  cost.  To  ask 
what  is  the  cost  of  production  of  a  thousand  dollars  is  un- 
meaning. The  thousand  dollars  may  represent  the  present 
value  of  no  longer  fashionable  dress-goods  which  originally 
cost  fifty  thousand  dollars,  or  it  may  represent  the  value  of  a 
newly  discovered  petroleum  well  which  cost  the  finder  nothing. 
In  another  sense,  however,  capital  has  a  cost.  The  mass  of 
capital  consists  of  individual  pieces  of  capital,  and  the  increase 
of  capital  depends  ultimately,  as  we  shall  see,  on  the  readiness 
to  forego  present  gratifications  for  future  satisfactions.  This 
readiness  involves  a  delay  and  generally  therefore  a  cost;  and 
interest,  as  we  shall  learn,  may  be  explained  in  terms  of  this 
marginal  cost.  But  here  again  the  cost  would  not  be  under- 
gone if  it  were  not  for  the  services  to  be  enjoyed.  So  that  in 
the  end  it  is  the  efficiency  of  the  service  which  is  the  positive 
factor.     The  cost  adjusts  itself  to  the  service. 


268  General  Law  of  Value  [§  114 

Thus  the  great  law  of  value  is  marginal  efficiency.  When 
the  economic  good  is  used  for  productive  purposes,  marginal 
efficiency  becomes  marginal  productivity;  but  when  it  is  used 
for  purposes  of  consumption,  we  cannot  well  speak  of  pro- 
ductivity. Not  only  in  the  case  of  wages  and  interest,  but  in 
the  case  of  economic  relations  and  of  concrete  commodities, 
reproducible  as  well  as  non-reproducible,  prices  depend  on 
marginal  efficiency.  In  all  economic  goods  except  labor,  we 
have  to  deal  with  capital  values;  in  all  economic  goods  except 
the  fund  of  capital  we  have  to  deal  with  rental  values:  the 
rental  as  well  as  the  capital  values  of  all  classes  of  goods  de- 
pend on  their  marginal  efficiency.  In  some  cases  marginal 
efficiency  means  marginal  productivity;  within  this  class  again 
marginal  productivity  is  in  some  cases  equivalent  to  the  cost 
of  production.  Cost  of  production  is  thus  only  a  partial,  and 
even  then  a  proximate,  explanation  of  value;  marginal  effi- 
ciency is  the  universal  and  the  ultimate  explanation. 

114.  Efficiency  and  Capitalization 

Because  of  this  frequent  lack  of  correspondence  between 
value  and  cost,  the  problem  of  the  valuation  of  complex  goods 
often  becomes  one  of  extreme  difficulty.  Where  such  a  good 
regularly  changes  hands  on  the  competitive  market,  the  diffi- 
culty is  obviated  by  the  automatic  action  of  the  forces  of 
demand  and  supply;  its  earning  capacity  or  marginal  service- 
ableness  can  be  gauged  with  almost  unerring  accuracy,  and  there 
will  be  a  fixed  rate  of  capitalization  depending,  as  we  have 
learned,  on  the  durabihty  and  certainty  of  income.  A  good  ex- 
ample of  this  equilibration  between  income  and  capital  value  is 
seen  on  the  stock  exchange,  where  the  slightest  alteration  in 
present  or  prospective  earnings  is  at  once  reflected  in  a  fluctua- 
tion of  the  quotations.  Even  here,  however,  we  must  remember 
that  the  stock  exchange  quotes  only  market  values;  and  that 
these  market  values  are  liable  to  be  affected  by  all  kinds  of  specu- 
lative influences  not  connected  with  real  earning  capacity. 


§  115]  Valuation  and  Taxation  269 

In  actual  life  we  have  to  deal  with  all  possible  combinations 
of  economic  goods.  The  value  of  a  simple  reproducible  com- 
modity may  indeed  be  explained  by  or  referred  to  the  cost  of 
production,  because  at  any  given  time  this  cost  is  adjusted  to 
the  price;  but  the  value  of  a  complex  product  or  business  may 
bear  only  a  slight  relation  to  cost.  The  value  of  a  livery 
stable  differs  somewhat  from  the  value  of  reproducing  the 
horses,  carriages,  harnesses  and  buildings;  the  value  of  a  huge 
steel  plant  differs  considerably  from  the  cost  of  the  land,  the 
buildings  and  the  machinery;  the  value  of  a  railroad  has  still 
less  relation  to  its  cost  of  production  or  of  reproduction.  In 
such  cases  we  have  to  do  not  only  with  reproducible  products, 
like  the  concrete  articles  of  steel  or  the  acts  of  transportation, 
but  with  non-reproducible  commodities  and  relations,  like  the 
good-will  of  the  firm,  the  favorable  location  of  the  railroad, 
the  ability  of  the  managers,  and  all  the  other  factors  which 
cannot  be  duplicated,  but  which  enhance  the  profitableness 
and  therefore  the  value  of  the  business.  Their  selling  value  is 
a  capitalization  of  their  estimated  future  uses. 

The  problem  of  capitalization  in  its  relation  to  efficiency 
has  become  important  in  three  fields,  —  that  of  taxation,  that 
of  regulation  and  that  of  investment.  To  each  of  these  we 
must  now  turn  our  attention. 

115.   Valuation  and  Taxation 

In  taxation  the  problem  presents  itself  in  two  forms.  The 
first  arises  in  those  countries  which  still  retain  the  property 
tax.  The  difficulty  can  be  illustrated  by  the  taxation  of  cor- 
porations. In  Europe  corporations  are  assessed  on  their 
income,  which  is  ascertained  according  to  fixed  rules.  In 
America  corporations  are,  for  reasons  already  mentioned 
(p.  15),  usually  assessed  on  their  capital  value.  How,  now,  is 
this  to  be  measured?  The  corpojate  securities  are  often  not 
dealt  in  on  the  stock  exchange,  and  even  when  there  are  such 
dealings,  the  daily  prices  may  be  affected  by  speculative  causes. 


270  General  Law  of  Value  [§115 

The  cost  of  production  is  of  slight  assistance,  because  it  can 
manifestly  apply  only  to  the  concrete  tangible  property,  and  is 
even  there  inadequate.  It  is  for  this  reason  that  the  valuation 
of  the  corporate  franchise,  as  the  chief  intangible  element,  has 
become  such  a  burning  question  in  the  United  States.  It  is 
plain,  however,  from  the  foregoing  discussion,  that  no  final 
solution  of  the  problem  is  possible  until  property  assessments 
are  brought  into  a  definite  relation  with  earning  capacity. 
When  commodities  frequently  change  hands,  as  is  the  case 
to-day  with  the  mass  of  concrete  goods,  real  or  personal, 
property  is  a  simpler  basis  of  assessment  than  income,  because 
the  market  influences  automatically  capitalize  the  income. 
But  when  sales  are  infrequent,  as  with  so  many  modern  cor- 
porations, income  or  rental  value  is  the  better  basis,  and  the 
so-called  property  assessments  must  ultimately  adjust  them- 
selves to  the  earning  capacity.  The  practical  difficulty  con- 
nected with  the  ascertainment  of  net  earnings  has  led  many 
States  to  adopt  the  system  of  gross  earnings  taxation.  This  is, 
however,  a  rough  device,  which  fails  to  secure  justice  as  among 
the  members  of  each  class;  corporate  gross  earnings  tell  us  as 
little  about  relative  net  earnings  as  the  mere  size  of  a  man's 
business  about  his  profits.  It  is  significant  that  in  the  newest 
attempts  to  fix  the  property  valuations  of  railroads,  as  in  Michi- 
gan, the  assessors  after  computing  the  selling  value  of  the  tangible 
property  estimate  the  value  of  the  intangible  property  by 
capitalizing  a  certain  portion  of  the  income  at  a  given  rate. 
Taxable  value  is  made  to  depend  ultimately  on  earning  capacity, 
—  that  is,  on  marginal  efficiency. 

The  other  phase  of  the  problem  is  of  broader  application. 
The  well-nigh  universal  source  of  state  and  local  revenue  in 
America  is  the  general  property  tax.  Ability  to  pay  is  deemed 
to  be  the  fundamental  canon  of  taxation,  and  a  man's  ability 
is  measured  by  his  property.-  Owing,  however,  to  the  growing 
difficulty  of  ascertaining  all  the  items  of  property,  certain  classes 
are  reached  with  less  accuracy  than  others,  and  the  tax  be- 


§  115]  Valuation  and  Taxation  271 

comes  virtually  a  partial  property  tax.  From  this  inequality 
of  taxation  flow  two  important  consequences.  In  the  first 
place  we  have  the  phenomenon  of  diffusion  of  taxation.  Where 
a  particular  class  of  property  is  singled  out,  the  tax  will  often 
be  shifted  from  the  producer  to  the  consumer,  or  from  the 
vendor  to  the  purchaser.  If  a  special  tax,  for  instance,  is  levied 
on  leather,  and  the  conditions  of  the  trade  are  such  that  the 
marginal  leather  dealer  can  still  remain  in  business,  the  tax 
will  be  added  to  the  price  that  the  shoemaker  has  to  pay;  and 
under  similar  conditions  the  shoemaker  will  increase  the  price 
of  shoes  to  the  consumer.  The  tax  is  shifted  from  one  class  to 
another  until  it  is  diffused  throughout  the  community.  If  a 
special  tax  is  levied  on  houses,  and  population  nevertheless 
continues  to  increase,  the  tax  will  be  shifted  from  the  owner 
to  the  tenant,  and  if  the  tenant  happen  to  employ  the  premises 
for  business  purposes,  the  tax  will  be  added  to  the  price  of 
the  goods  displayed  for  sale.  Furthermore,  if  these  goods 
are  utilized  as  the  materials  of  some  new  production,  the  pro- 
cess will  repeat  itself,  until  the  final  consumer  is  reached. 
If  a  tax  is  levied  on  real  estate  mortgages,  the  rate  of  interest 
wiU  rise  by  at  least  the  amount  of  the  tax,  and  the  burden  will 
be  borne,  not,  as  is  often  assumed,  by  the  one  who  lends,  but 
by  the  one  who  borrows;  and  if  the  borrower  happens  to  be 
a  housebuilder,  it  wiU  be  further  shifted  to  the  purchaser  and 
again  to  the  tenant,  with  ulterior  consequences  analogous  to 
those  just  described.  Through  the  process  of  shifting,  taxation 
of  the  property  often  turns  out  to  be  different  from  taxation  of 
the  property  owner. 

On  the  other  hand,  when,  instead  of  dealing  with  perish- 
able things  like  leather  or  houses,  or  with  a  mere  right  to  a 
sum  of  money  like  a  mortgage,  we  deal  with  more  permanent 
things,  like  a  piece  of  land  or  the  fund  of  capital  itself,  the 
influence  of  capitalization  makes  itself  apparent.  If  a  tax  of 
one  per  cent  is  imposed  on  a  five  per  cent  hundred-dollar 
bond  selling  at  par,  the  net  proceeds  to  the  new  purchaser  will 


272  General  Law  of  Value  [§  115 

be  only  four  dollars,  and  the  price  of  the  bond  will  fall  to 
eighty  dollars,  —  four  dollars  bearing  the  same  proportion  to 
eighty  dollars  as  five  to  a  hundred  dollars.  There  is  no  reason 
why  people  should  content  themselves  with  four  per  cent 
earnings  when  the  general  rate  of  interest  in  the  untaxed  field 
is  five  per  cent.  In  the  same  way,  when  a  special  tax  is  levied 
on  land,  its  value  will  be  reduced  by  the  capitalization  of  the 
tax.  The  important  consideration  in  each  case  is  the  net 
income,  or  net  rental;  and  when  this  is  curtailed  by  the 
imposition  of  a  tax,  the  selling  value  will  be  reduced  in  pro- 
portion. Since  the  selling  value  is  the  capitalization  of  the 
rental  value,  the  diminution  in  the  selling  price  is  equivalent 
to  a  capitalization  of  the  tax.  When  a  new  purchaser  buys 
the  bond  or  the  land,  he  discounts  future  taxes  of  the  same 
rate  by  paying  so  much  less  for  the  property;  in  other  words, 
he  buys  himself  free  of  the  tax.  Just  as  the  tax  in  the  pre- 
ceding case  was  shifted,  so  now  the  tax  is  absorbed,  —  absorbed 
into  a  lower  selling  price. 

The  far-reaching  consequence  is  this:  when  classes  of  prop- 
erty are  taxed,  the  processes  of  diffusion  and  of  absorption 
often  result  in  what  may  be  termed  the  elision  or  final  disap- 
pearance of  the  tax.  Under  the  conditions  of  modern  busi- 
ness enterprise,  when  people  part  with  their  property  the  tax 
tends  finally  to  disappear  as  a  permanent  burden  on  the  class 
upon  which  it  is  sought  to  be  imposed.  It  is  not  necessary, 
therefore,  in  order  to  secure  justice  in  taxation,  that  all  individ- 
uals or  every  item  of  property  be  taxed.  Within  each  class  of 
property  holders  every  one  indeed  must  be  assessed;  but  as 
between  the  classes  of  property  economic  forces  will  bring 
about  a  readjustment.  The  process  is  often  a  painful  one, 
and  in  order  to  injure  the  present  owners  as  little  as  possible 
great  care  must  be  observed  in  altering  existing  methods. 
But  the  ideal  of  imposing  taxes  on  property,  rather  than  upon 
individual  property  owners,  must  be  constantly  kept  in  mind. 
The  attempt  in  the  United  States  to  assess  every  person  upon 


§  ii6]  Valuation  and  Regulation  273 

all  his  property  creates  gross  injustice,  because  by  our  hit-or- 
miss  system  some  individuals  in  a  given  class  are  assessed  and 
some  escape.  Those  that  escape  are  generally  the  wealthy; 
those  that  are  reached  are  for  the  most  part  the  ones  who 
cannot  afford  to  pay.  The  general  property  tax  practically 
results  in  a  travesty  of  justice.  When  we  abandon  the  imprac- 
ticable attempt  to  tax  all  property  owners  alike,  and  when, 
realizing  that  taxation  like  value  itself  is  a  social  phenomenon, 
we  learn  to  tax  some  kinds  of  property  rather  than  aU  kinds 
of  individuals,  we  shall  have  made  a'  great  stride  forward  in 
practical  as  well  as  theoretical  justice.  It  is  a  process  which 
is  now  slowly  going  on' in  the  more  advanced  industrial  com- 
munities of  America.  Consciously  or  unconsciously,  it  rests 
upon  the  conviction  that  capital  or  property  values  depend  in 
last  instance  on  maiginal  efficiency  or  net  earnings. 

116.   Valuation  and  Regulation 

Another  phase  of  the  problem  is  seen  in  the  difficulty  con- 
nected with  the  official  regulation  of  rates  charged  by  railroad, 
gas  or  water  companies.  Where  such  businesses  tend  to  be- 
come monopolies  the  legislator  seeks  to  protect  the  consumer 
from  exorbitant  charges  by  fixing  maximum  rates.  In  justice, 
however,  the  criterion  of  what  is  fair  to  the  consumer  must  be 
affected  by  what  is  fair  to  the  producer,  for  the  producer  is 
also  entitled  to  a  fair  return  on  his  capital.  The  whole  prob- 
lem thus  hinges  on  the  question:  what  is  the  relation  of  the 
actual  capital  value  of  the  business  to  the  invested  capital? 
Is  the  actual  value  the  par  value  of  the  securities?  Manifestly 
not,  because  the  stock  may  have  been  watered  to  such  an  ex- 
tent that  its  actual  value  is  only  a  fraction  of  the  par  value.  Is 
it  the  market  value  of  the  securities?  Not  always.  For  the 
market  value  of  the  bonds  depends  not  only  on  the  rate  of 
interest,  but  also  on  the  period  for  which  they  have  to  run.  If 
a  four  per  cent  bond  sells  at  par,  a  six  per  cent  bond  of  the 
same  corporation  and  of  the  same  security  would  normally  sell 
18 


274  General  Law  of  Value  [§  ii6 

around  150.  But  if  the  four  per  cent  security  is  a  long-time 
bond,  and  the  six  per  cent  a  short-time  bond,  the  difference 
will  be  far  less.  Furthermore,  even  if  they  are  both  fifty 
year  bonds  but  emitted  at  different  periods,  and  if  the  six  per 
cent  bond  matures  in  a  few  years,  the  premium  will  rapidly  de- 
cline with  each  ensuing  year  until  it  finally  disappears.  The 
market  value  of  the  bonds  hence  depends  largely  upon  the 
conditions  of  repayment,  and  is  to  this  extent  divorced  from 
the  value  of  the  corporate  property  as  such.  Moreover,  if  we 
take  stocks  instead  of  bonds,  we  find  that  the  value  of  the  cor- 
porate property  cannot  be  strictly  measured  by  the  market 
value  of  the  shares,  because  this  market  value  is  subject  to 
violent  oscillations  on  the  stock  exchange.  The  market  value 
of  the  shares  of  the  Third  Avenue  Street  Railway  Company  in 
New  York  fluctuated  a  few  years  ago  over  one  hundred  per 
cent  in  the  same  year.  On  what  basis  could  the  real  value 
have  been  computed? 

Finally  it  may  be  asked:  is  the  actual  capital  value  of  the 
corporations  to  be  measured  by  the  cost  of  production  or  of  re- 
production (or,  as  it  is  sometimes  termed,  the  cost  of  replace- 
ment)? Here,  again,  the  answer  is,  not  entirely.  For  this 
method  would  take  no  account  of  the  franchises,  acquired  re- 
lations and  general  business  conditions  which  have  developed, 
and  for  the  creation  of  which  the  corporation  may  or  may  not 
be  responsible.  A  railway  running  through  a  frontier  com- 
munity may  cost  in  stretches  as  little  as  fifteen  thousand  dol- 
lars a  mile  to  build;  after  the  lapse  of  twenty  years,  the  cost 
of  reproduction  as  measured  by  double  tracking,  better  road- 
bed, new  stations,  bridges,  equipment  and  increased  value  of 
the  land  may  be  perhaps  thirty  thousand  dollars  a  mile.  Yet 
a  capitalization  of  the  actual  earning  capacity  might  result  in 
at  least  double  that  sum.  To  declare  the  entire  difference  to 
be  "water,"  and  to  adjust  rates  so  that  the  old  stockholder 
should  not  profit  by  the  building  up  of  the  country,  or  so  that  the 
new  purchaser  who  has  invested  in  good  faith  should  have  his 


§  117]  Valuation  and  Investment  275 

income  cut  in  half  would  manifestly  be  unjust.  A  corporation, 
like  an  individual,  is  entitled  to  participate  in  the  advantages  of 
general  prosperity. 

The  Supreme  Court  of  the  United  States  has  recognized  the 
truth  that  not  one,  but  all  of  these  factors  must  be  taken  into 
consideration.^  The  ultimate  test  of  fair  capital  value  depends 
on  a  comparison  of  the  earnings  of  the  enterprise  in  question 
with  those  of  well-managed  and  reputedly  not  overcapitalized 
undertakings  of  a  similar  character. 

117.  Valuation  and  Investment 

The  third  difficulty  connected  with  valuation  and  capitaliza- 
tion is  seen  in  the  flotation  of  securities  at  the  time  of  the  organi- 
zation or  reorganization  of  great  business  enterprises.  In  former 
years  the  chief  example  was  that  of  railroads.  While  the  early, 
small  railroads  were  largely  built  on  the  proceeds  of  money 
actually  invested  by  the  shareholders,  it  was  not  long  before 
the  doubtful  success  of  the  more  elaborate  enterprises  in  newer 
sections  led  to  the  issue  of  mortgage  bonds,  often  below  par, 
while  the  stock  was  sold  at  an  insignificant  price  or  even  pre- 
sented to  the  shareholders,  in  order  to  make  a  better  market 
for  the  bonds.  In  the  same  way,  when  railways  were  amalga- 
mated or  reorganized,  the  issue  of  new  stock  often  exceeded  the 
aggregate  of  the  old,  the  excess  representing  the  capitalization 
of  the  increased  earnings  which  it  was  expected  would  result 
from  the  combination.  In  these  two  cases  the  issue  of  stock 
might  be  economically  justifiable  either  as  the  sole  practicable 
method  of  securing  capital  for  a  new  and  doubtful  enterprise, 
or  as  the  best   means  of   reducing  prospective  earnings  to   a 

^  Smyth  V.  Ames,  169  U.  S.  466  (1898).  "  In  estimating  the  value  of 
a  railroad,  the  following  points  must  be  considered :  The  original  cost  of 
construction,  the  amount  expended  in  permanent  improvement,  the 
amount  and  market  value  of  the  bonds  and  stock,  the  present  as  com- 
pared with  the  original  cost  of  construction,  the  probable  earning 
capacity  of  the  property,  and  the.  sum  required  to  meet  operating 
expenses." 


276  General  Law  of  Value  [§  117 

present  basis.  In  the  one  case  the  stock  presented  or  sold  at 
a  discount  represents  the  present  worth  of  an  insecure  and 
speculative  future;  in  the  other  case  the  stock  is  the  capitaliza- 
tion of  a  future  income,  just  as  the  issue  of  securities  for  doub- 
ling the  track  is  legitimate  only  when  the  traffic  is  expected 
to  be  so  heavy  as  to  increase  the  income  at  least  to  the  point 
of  earning  a  return  on  the  new  capital.  In  all  such  cases  we 
cannot  properly  speak  of  overcapitalization  or  stock-watering. 

Unfortunately,  however,  there  is  always  the  danger  that  the 
anticipations  may  be  mistaken,  or  that  the  calculations  may 
be  designedly  falsified  in  order  to  enable  the  manipulators  to 
dispose  of  stock  whose  worthlessness  they  suspect  or  know. 
Finally,  when  it  seems  desirable,  for  the  purpose  of  evading 
legislative  restrictions  or  of  placating  public  opinion,  to  keep 
down  the  dividend  rate,  the  amount  of  stock  may  be  augmented 
by  the  device  of  scrip  dividends  or  an  increase  of  the  nominal 
amount  of  the  securities  in  the  hands  of  the  shareholders.  In 
all  such  cases  we  have  to  deal  with  stock-watering  pure  and 
simple,  —  that  is,  the  creation  of  additional  securities  which  do 
not  represent  additional  earning  capacity. 

Since  the  formation  of  the  modern  industrial  combinations 
known  as  trusts,  this  aspect  of  capitalization  has  assumed  still 
greater  importance.  The  chief  danger  of  the  situation  con- 
sists in  the  facility  afforded  to  unscrupulous  promoters  to 
finance  the  organization  of  the  combination  in  such  a  way  as 
to  deceive  the  investors  and  to  reserve  the  greatest  profit  for 
themselves,  by  selling  the  inflated  securities  at  prices  wholly 
unjustified  by  prospective  earnings.  The  mere  fact  that  the 
united  capital  of  a  combination  exceeds  the  aggregate  capital 
of  the  constituent  companies  does  not  prove  the  existence  of 
overcapitalization;  for  if  the  new  enterprise  is  honestly  financed 
and  well  managed,  the  very  fact  of  union  may  so  enhance  the 
earning  capacity  of  the  whole  as  to  justify  this  capitalized  antici- 
pation of  estimated  profits.  The  distinction  between  economic 
and  uneconomic  finance  or  between  actual  value  and  water    in 


§  117]  Valuation  and  Investment  277 

the  investment  of  capital  is  the  distinction  not  only  between 
honesty  and  dishonesty  but  between  intelligence  and  stupidity. 
While  stupidity  will  always  avenge  itself  on  the  stupid,  the 
burden  of  dishonesty  is  likely  to  be  borne  by  the  innocent 
victim.  When  the  loophole  of  competition  is  left  open,  the 
victim  is  not  the  consumer  but  the  unwary  investor;  when 
competition  is  stifled,  the  loss  may  fall  on  either  or  both. 
The  modern  demand  that  government  should  at  least  insure 
publicity  of  accounts  and  a  reasonable  correspondence  between 
the  prospectus  and  the  actual  facts  in  organizing  vast  enter- 
prises is  a  natural  result  of  the  dangers  of  overcapitalization. 


Book  II 

A 

\ 

Value  and  Production 


CHAPTER  XVIII 
CHARACTER  AND  FACTORS  OF  PRODUCTION 

118.   References 

A.  Marshall,  Principles  (1910),  bk.  iv,  ch.  i;  W.  Smart,  Distribution  of 
Income  (1899),  bk.  i,  ch.  v;  F.  A.  Fetter,  Principles  (1915),  chs.  ix,  x;  J.  S. 
Nicholson,  Principles  (1893-1901),  bk.  i.  ch.  ii;  J.  A.  Hobson,  Economics 
of  Distribution  (1900),  ch.  vi;  H.  Sidgwick,  Principles  (1883),  bk.  i, 
chs.  i,  iv;   F.  A.  Walker,  Political  Economy  (1888),  part  2,  ch.  iv. 

119.  Production:   Its  Meaning  and  Relation  to 
Consumption 

All  wealth  may  be  regarded  from  the  point  of  view  of  the 
producer  or  of  the  consumer.  Commodities  in  the  hands  of 
the  consumer  and  destined  to  immediate  consumption  are 
sometimes  called  consumers'  goods,  while  those  forms  of 
wealth  reserved  for  the  purpose  of  increasing  the  stock  of 
consumable  commodities  are  called  producers'  goods.  Be- 
cause the  latter  serve  as  instruments  of  production,  they  are 
sometimes  called  instrumental  goods. 

Production  and  consumption  clearly  refer  only  to  utilities. 
Man  can  create  nothing  material;  he  can  only  impart  motion 
to  particles  of  matter  and  so  rearrange  them  that  in  their  new 
form  they  will  gratify  some  desire.  So  also  he  can  destroy 
nothing  material,  for  matter  is  indestructible;  he  can  only  so 
rearrange  the  position  of  the  particles  as  to  put  an  end  to 
their  utility  in  that  particular  form.     Production  and  consump- 

278 


§  iig]  Relation  to  Consumption  279 

tion  thus  mean  the  creation  and  destruction,  not  of  matter, 
but  of  utiUties  through  the  movement  of  matter. 

From  a  certain  point  of  view  production  and  consumption 
are  two  sides  of  the  same  thing.  All  wealth  is  sooner  or  later 
destroyed  in  the  sense  that  the  utilities  embodied  in  the 
particular  commodity  finally  come  to  an  end.  Every  new 
arrangement  of  matter  by  man  ultimately  involves  an  act  of 
consumption,  partial  or  complete.  We  cannot  produce  any- 
thing without  consuming  something,  —  either  commodities  or 
energy,  which  is  itself  in  last  resort  maintained  by  commodi- 
ties. We  can  make  steam  only  by  using  coal;  we  can  produce 
goods  only  by  wearing  out  the  tool  or  machine.  Not  only 
does  production  involve  consumption,  but  consumption  might 
be  said  to  involve  production.  Production  is  the  creation  of 
utilities.  Commodities  are  consumed  because  they  satisfy 
some  want,  and  in  satisfying  this  want  they  impart  utility.  So 
that  all  consumption  short  of  wanton  or  accidental  destruction 
would  seem  to  imply  production,  because  it  indirectly  yields 
utilities.  Consumption  would  then  involve  production,  just  as 
production  involves  consumption. 

The  distinction,  however,  is  none  the  less  real,  even  though 
difl&cult  to  draw  in  special  cases.  The  criterion  of  production 
is  nvot  the  imparting  of  a  utility,  but  the  creation  of  a  new 
utiUty.  It  is  only  when  an  action  brings  about  an  addition  to 
the  existing  sum  of  utilities,  when,  in  other  words,  there  is  a 
resulting  surplus  of  utility,  that  we  have  an  act  of  production. 
When  a  railroad  company  buys  coal  and  converts  it  into  loco- 
motive power,  there  is  an  act  of  production,  because,  notwith- 
standing the  consumption  of  the  coal,  the  utilities  afforded  by 
the  steam  replace  those  afforded  by  the  coal  together  with  an 
addition.  There  is  more  wealth  than  before.  On  t)ie  other 
hand,  the  food  which  a  man  consumes,  although  it  serves  to 
keep  up  his  strength,  imparts  to  him  certain  personal  quali- 
ties which,  as  we  know,  are  not  wealth.  They  may  help  him 
to  produce   wealth   in   the  future,   but   do   not   in   themselves 


28o  Production  [§  119 

constitute  wealth.  The  consumption  of  coal  by  an  engine 
and  of  food  by  a  laborer  are  therefore  not  on  a  par;  the  one 
is  an  act  of  production,  the  other  an  act  of  consumption.  In 
the  one  man  produces  wealth;  in  the  other  wealth  produces 
man.  Production  and  consumption  are  as  opposed  as  wealth 
and  man. 

Since  wealth  and  man  are  mutually  interdependent,  produc- 
tion and  consumption  are  closely  related.  In  a  well-ordered 
community  the  object  of  consurnption  is  more  production  of 
wealth  and  ultimate  welfare.  Consumption,  however,  does 
not  necessarily  lead  to  this  result.  A  glutton  who  wastes  his 
life  in  riotous  living  decreases  his  power  of  serving  others. 
Thus,  while  consumption  may  be  productive  in  the  sense  that 
it  creates  the  conditions  of  a  future  production,  consumption 
differs  from  production.  Wise  consumption  indeed  leads  to 
more  production:  only  in  this  sense  are  they  two  aspects  of 
the  same  thing.  The  whole  economic  process  is  a  flow  of 
utilities  from  nature  to  man,  and  back  from  man  to  nature. 

It  is  important  to  remember,  moreover,  that  the  utihties 
which  constitute  wealth  are  not  necessarily  embodied  in  tan- 
gible objects.  Production  is  not  limited  to  the  creation  of 
physical  commodities.  The  older  economists  maintained  that 
the  labor  of  servants,  actors  and  the  professional  classes  in 
general  was  unproductive,  because  not  incorporated  in  visible 
objects.  So  other  writers,  like  Carey,  have  urged  that  the 
trader  is  unproductive;  and  still  others,  like  the  Physiocrats, 
have  contended  that  only  the  farmer  is  really  productive.  To 
those  who  understand  that  human  wants  are  satisfied  by  utili- 
ties, irrespective  of  the  source  whence  they  flow,  it  is  clear 
-iliai_  all  labor  which  engenders  such  utilities  is  productive. 
Labor  is  unproductive  only  when  its  efforts  are  wasted.  If  I 
write  a  book  which  is  read,  or  make  a  table  which  is  used,  my 
labor  is  productive;  if  the  book  is  a  failure,  or  the  table  use- 
less, my  labor  is  unproductive.  The  trader,  the  lawyer,  the 
doctor,  the  artist,  are  no  less  productive  than  the  workman, 


§  i2o]  Kinds  of  Production  281 

the  farmer  or  the  manufacturer,  provided  they  accomplish 
something  that  society  wants.  The  test  is  the  creation  of 
new  utiUties  or  values. 

The  utilities  of  which  we  speak  are,  again,  not  necessarily 
direct  utiHties.  The  making  of  electric  lights  is  the  creation  of 
direct  utilities;  the  erection  of  a  successful  school  devoted  to 
the  study  of  electricity  is  the  creation  of  indirect  utilities, 
because  it  will  ultimately  result  in  better  and  cheaper  lights. 
In  the  one  case  we  are  producing  commodities,  in  the  other 
productive  forces;  in  both  cases  we  are  contributing  to  the 
production  of  wealth.  In  the  same  way  the  sums  expended  by 
a  government  for  its  army  and  navy  may  be  productive  in  the 
highest  sense  if,  as  sometimes  happens,  they  really  contribute 
toward  the  protection  or  furtherance  of  the  national  industry 
or  of  the^  national  existence  which  makes  industry  possible.  If 
they  do  not  do  this,  they  are  unproductive,  but  only  in  the 
sense  that  any  unnecessary  or  wasted  effort  is  unproductive. 
Intangible  products,  like  culture  and  taste,  are  often  extremely 
important  to  individual  and  state  alike,  and  when  they  rest  on 
a  broad  basis  of  tangible  wealth  they  are  the  distinguishing 
mark  of  a  high  civilization. 

120.   Kinds  of  Production 

Production  of  wealth  thus  means  the  creation  of  new  utili- 
ties. The  utilities  that  can  be  added  to  things  are  of  three 
kinds,  —  material,  place  and  time  utilities.  A  material  utility  '• 
can  be  created  by  an  alteration  in  any  property  of  matter;  a 
change  in  the  form,  shape,  weight,  color,  taste,  smell  or  any 
other  quality  of  a  thing  which  increases  its  capacity  to  satisfy 
human  wants  is  the  creation  of  a  new  material  utility.  Utility 
can,  however,  also  be  enhanced  by  a  change  of  place.  A  thing 
in  one  place  may  be  worth  more  than  in  another.  If  the  wheat 
were  allowed  to  remain  on  the  Western  plains,  its  utility  would 

*  Some  writers  speak  of  this  as  a  form  utility.  It  is  dear,  ho\ve\er, 
that  form  is  not  the  only  quality  susceptible  of  change. 


282  Production  [§  120 

be  greatly  circumscribed;  instead  of  satisfying  the  wants  of 
millions,  it  would  be  consumed  only  by  thousands.  Finally, 
utilities  can  be  augmented  by  a  mere  change  in  time.  The 
alteration  may  take  place  in  the  supply:  old  coins,  fine  statues, 
rare  prints  and  the  like  improve  in  desirability  through  the  mere 
lapse  of  time;  forests,  flocks  and  the  like  increase  in  quantity. 
More  frequently,  however,  the  alteration  occurs  in  the  demand: 
things  may  be  more  useful  at  one  period  than  at  another.  The 
efforts  expended  in  holding  the  commodity  until  it  can  be  of  the 
most  effective  service  involve  the  creation  of  time  utilities. 

All  wants  are  satisfied,  if  at  all,  at  a  given  time  and  place. 
The  creation  of  time  and  place  utilities  is  as  truly  productive 
of  wealth  as  the  creation  of  elementary  material  utilities.  In  each 
case  we  enhance  the  capacity  to  gratify  desires.  Trade  and 
transportation,  which  deal  with  place  utilities,  as  well  as  specula- 
tion and  insurance,  which  deals  with  time  utilities,  are  no  less  pro- 
ductive than  the  activity  expended  in  creating  material  utilities. 
It  is  for  this  reason  that  the  subject  of  exchange  is  properly  to 
be  regarded  as  a  part  of  production.  It  is  for  the  same  reason 
that  it  is  impossible  to  classify  different  kinds  of  activity  as  in 
themselves  more  or  less  productive  or  non-productive.  The 
causes  which  condition  the  law  of  comparative  costs  vary  from 
time  to  time  and  from  place  to  place.  Where  land  is  cheap, 
agriculture  may  be  more  productive  than  industry;  where 
geographical  conditions  are  favorable,  commerce  may  be  more 
productive  than  either.  To  raise  oranges  in  the  Arizona  desert 
would  be  as  unproductive  as  to  put  a  steel  plant  in  the  wheat- 
fields  of  Kansas;  yet  when  the  Arizona  desert  is  made  to 
bloom  by  irrigation,  or  when  Kansas  becomes  the  home  of  a 
teeming  population,  oranges  and  steel  may  become  the  most 
productive  of  enterprises.  The  same  considerations  apply  to 
the  productivity  of  efforts  embodied  in  immaterial  wealth.  For 
Oklahoma  to  build  a  magnificent  art  gallery  would  be  clearly 
wasteful;  for  New  York  to  spend  large  sums  on  music  and  art 
may  be  highly  productive,  even  regarded  from  the  narrow  point 


i2i]  Factors  of  Production  283 

of  view  of  increasing  the  capacity  of  the  artisan  to  create  more 
artistic  and  therefore  more  valuable  products.  A  high-priced 
ichool-teacher  would  be  as  unproductive  at  the  country  cross- 
roads as  a  piano  factory  in  Alaska.  Productivity  depends  on 
the  ratio  of  efforts  to  needs;  with  changing  needs  the  same 
efforts  wiU  mean  an  altered  productivity. 

121.   Factors  of  Production 

Since  the  foundations  of  economic  life  are  nature  and  man, 
the  primary  factors  of  production  must  be  natural  forces  and 
human  effort.  Sometimes  natural  forces  alone  suffice,  —  as  in 
the  case  of  the  spontaneous  increase  of  a  herd  of  cattle; 
sometimes  human  effort  sufi&ces,  as  in  the  case  of  the  rendering 
of  a  personal  service;  ordinarily  production  involves  the  co- 
operation of  the  two.  This  is  sometimes  expressed  by  the 
statement  that  the  factors  of  production  are  labor  and  land,  — 
a  not  entirely  accurate  statement,  because  land  is  only  one 
of  the  natural  elements  that  come  into  consideration.  Water, 
light,  heat,  electricity,  moisture  and  the  like  also  play  a  role  in 
production,  and  frequently  constitute  economic  goods  with  a 
definite  exchange  value.  Again,  since  the  apphcation  of  labor 
to  natural  elements  results  in  material  objects,  which  are  then 
further  utilized  in  production,  these  are  often  spoken  of  as 
capital,  and  the  factors  of  production  are  declared  to  be  land, 
labor  and  capital.  Capital  would  then  be  differentiated  from 
land  in  that  capital  is  itself  an  artificial  product,  while  land  in 
the  wider  sense  is  a  gift  of  nature. 

The  question  whether  land  should  be  sharply  separated  from 
capital  may  be  left  for  later  consideration  (§132).  It  may, 
however,  be  stated  here  that  the  controversy  is  largely  one 
of  words,  depending  on  the  sense  in  which  capital  is  used.  If 
by  capital  we  mean  a  concrete  commodity,  the  joint  product 
of  labor  and  nature,  land  is  to  be  differentiated  from  capital. 
If,  on  the  other  hand,  by  capital  we  mean  wealth  as  a  fund, 
land  is  a  part  of  capital,  since  it  has  a  capital  value.     Even, 


284  Production  [§  121 

however,  if  we  consider  land  as  a  part  of  capital,  it  is  so  im- 
portant a  part  that  it  may  for  many  purposes  be  put  in  a 
category  by  itself. 

Again,  since  the  labor  of  directing  or  managing  enterprises 
has  become  so  significant,  we  might  distinguish  between  laboi 
in  general  and  the  skill  or  ability  to  conduct  a  business.  The 
factors  of  production  would  then  be  land,  labor,  capital  and 
management  or  enterprise.  This  classification,  however,  is  not 
entirely  free  from  objection.  If  a  shoemaker  works  for  another, 
his  activity  would  be  called  labor;  if  he  works  for  himself,  it 
would  be  called  enterprise.  If  a  factory  owner  manages  his 
own  plant,  it  would  be  enterprise;  if  he  sells  it  to  a  trust  and 
assumes  the  management  as  a  paid  official,  the  same  activity 
is  called  labor.  Manifestly  this  overlooks  the  fact  that  there 
are  all  kinds  or  gradations  of  labor,  from  ordinary  unskilled 
work  to  the  exercise  of  the  highest  business  talent.  It  is  clear, 
from  the  examples  just  given,  that  the  distinction  is  impor- 
tant rather  from  the  point  of  view  of  distribution  than  from 
that  of  production.  If  the  income  from  labor  is  a  stipu- 
lated one,  it  is  wages,  whether  it  applies  to  a  day  laborer  or 
to  a  railway  president;  if  the  income  is  a  contingent  one  it  is 
profits.  If  a  man  uses  his  own  unaided  labor,  he  can  earn 
wages;  if  he  combines  his  labor  with  capital  in  a  business  en- 
terprise or  if  he  employs  other  people's  labor,  he  undergoes 
risks  and  his  income  is  uncertain.  The  hired  or  salaried  man 
always  gets  a  part  of  the  product,  the  independent  entrepreneur; 
may  lose  money  instead  of  making  it.  The  law  of  profits  is 
different,  as  we  shall  see,  from  the  law  of  wages.  From  the 
point  of  view  of  production,  however,  enterprise  is  a  species 
of  labor. 

Finally,  it  must  not  be  forgotten  that  in  civilized  society 
production  is  carried  on  amid  an  environment  moulded  by 
legal,  political  and  social  relations.  All  these  may  in  a  sense 
be  declared  necessary  to  production;  but  as  they  are  in  theory 
at  least   applicable  to  all  alike,   they  are  not  to  be  included 


§  122]        Production  and  the  Producer  285 

among  the  economic  factors  of  production  any  more  than  is 
the  air  which  is  free  to  all.  Even  where  these  relations  in  the 
shape  of  special  laws  or  privileges  favor  some  producers  or 
classes,  they  are  properly  to  be  put  under  the  head  of  oppor- 
tunity to  utilize  labor  and  capital  rather  than  under  that  of 
the  primary  factors  of  production. 

Summing  up,  we  may  say  that  the  factors  of  production  are 
In  one  sense  labor  and  capital;  in  another  sense  land,  labor 
and  capital,  and  in  still  a  third  sense  land,  labor,  capital  and 
enterprise.  In  any  sense  the  factors  of  production  are  human 
pnergy  and  natural  forces,  together  with  their  joint  product, 
capital,  which  may  again  be  embodied  in  land  or  other  ele- 
ments of  nature. 

122.   Production  and  the  Producer 

Whatever  classification  of  the  agents  of  production  may  be 
adopted,  one  vital  distinction  must  be  observed.  In  the  case 
of  the  non-human  factors  of  production,  whether  they  consist 
of  natural  forces  or  the  results  of  the  application  of  labor  to 
nature,  we  have  to  deal  with  inanimate  objects  and  phenomena. 
The  laws  of  their  increase  can  be  considered  without  refer- 
ence to  any  but  the  technical  consequences  to  the  things 
themselves.  Where  changes,  for  instance,  take  place  in  the 
productivity  of  concrete  things,  the  social  results  —  that  is,  the 
influence  on  classes  of  human  beings  — ■  may  indeed  be  pro- 
found, but  the  objects  in  themselves  still  remain  inert  masses, 
and  the  laws  which  control  their  earnings  are  irrespective  of  the 
particular  individuals,  that  happen  to  own  them.  When  the 
machine  is  useless,  we  throw  it  aside;  when  the  land  is  worn 
out,  we  leave  it. 

On  the  other  hand,  when  we  deal  with  human  energy,  we 
cannot  dissociate  it  from  the  individual  who  e.xerts  the  energy. 
This  does  not  mean  that  the  laws  of  production  are  less  verifiable 
here  than  in  the  case  of  inanimate  objects.  For  the  personal 
equation   or  difference   between  individuals  presents  no   more 


286  Production  [§  122 

diflSculties  in  analj^sis  ihan  do  the  differences  between  things. 
The  distinction  is  to  be  sought  rather  in  the  fact  that  in 
the  one  case  we  deal  only  with  the  means  and  in  the  other 
with  both  the  means  and  the  end.  Human  energy,  like  in- 
animate objects  and  forces,  forms  the  tools  by  which  wealth 
is  secured;  man  alone  represents  the  end  for  which  wealth 
is  secured.  Hence  in  dealing  with  the  problems  of  production 
through  human  agencies  we  cannot  eliminate  the  consideration 
of  the  producer  as  at  the  same  time  a  consumer.  This  has  a; 
double  aspect. 

In  the  first  place  it  admonishes  us  that  the  process  of  pro- 
duction is  social,  and  that  all  production  ultimately  involves 
consumption.  Any  system  of  production,  therefore,  which  i 
systematically  neglects  the  consuming  powers  of  the  producer 
must  in  the  end  defeat  itself.  The  methods  of  production  may 
conform  to  all  the  approved  technical  rules,  and  each  industry 
may  seem  to  be  flourishing  from  the  point  of  view  of  output, 
yet  none  the  less  the  general  condition  of  business  may  be  far 
from  satisfactory  owing  to  the  lack  of  an  adequate  demand.  In 
former  times,  where  production  was  relatively  slight,  as  in  the 
middle  ages,  or  where  it  was  largely  based  upon  unpaid  human 
labor,  as  in  antiquity,  it  was  the  luxuries  of  the  few  rather  than 
the  wants  of  the  many  that  constituted  the  bulk  of  the  demand. 
In  modern  times,  on  the  other  hand,  where  human  energy  is 
untrammelled  and  the  play  of  competition  tends  to  become 
ever  more  free,  the  effective  demand  comes  from  the  wants  of 
the  many.  If  we  stunt  this  demand,  we  withdraw  the  chief 
stimulus  to  wealth  creation.  The  human  beings  may  be  mag- 
nificent productive  instruments,  but  if  there  is  no  market  for 
their  products  their  potential  energy  is  not  converted  into 
actual  results.  The  more  democratic  the  people,  the  more 
intimate  is  the  dependence  of  the  productive  power  of  the 
community  upon  the  consuming  capacity  of  the  masses. 

Secondly,   we   must   be   careful   to   take   the  broad   view  of 
the  economic  process.     As  we  have  seen,  the  real  concern   of 


5  122]  Production  and  Producer  287 

jconomic  inquiry  is  not  wealth  in  itself,  but  wealth  in  its  rela- 
:ion  to  man,  or,  still  better,  man  in  relation  to  wealth.  A 
system  of  production  which,  however  successful  in  other  re- 
spects, relegates  the  human  factor  to  the  same  level  as  the 
external  object,  is  uneconomic  in  the  broad  sense,  because, 
nstead  of  subordinating  wealth  to  man,  it  sacrifices  man  to 
i^realth.  A  production  of  wealth  which  is  based  upon  disre- 
gard of  the  human  rights  of  the  producer  is  no  more  truly 
conomic  than  is  the  defrauding  of  one  party  to  a  bargain 
3y  the  other.  There  are  certain  kinds  of  so-called  produc- 
;ion  which  in  the  highest  economic  sense  no  civilized  country 
:an  afford  to  retain.  Slavery  at  one  time  nominally  enriched 
intiquity,  but  it  brutalized  the  slave  and  enervated  the  slave- 
lolder,  until  it  dried  up  the  sources  of  production  itself. 
3hild  labor  at  the  beginning  of  the  nineteenth  century  helped 
;o  swell  the  profits  of  the  English  factory  owner,  but  was  fast 
ncapacitating  the  population,  physically  as  well  as  mentally 
md  morally.  If  the  Devil  must  be  a  partner  in  our  cotton 
actories,  said  Carlyle,  we  cannot  afford  to  have  the  cotton 
iactories.  And  in  saying  this  he  uttered  a  truth  which  was 
10  less  important  in  its  economic  than  in  its  moral  aspects. 


CHAPTER  XIX 
LABOR 

123.   References 

F.  A.  Walker,  The  Wages  Question  {iS-jdi),  chs.  ii-iv,  and  Political  Econ- 
omy (1888),  part  2,  ch.  ii;  A.  Philip,  The  Function  of  Labor  in  the  Pro- 
duction of  Wealth  (iSgo);  A.  Marshall,  Principles  (1910),  bk.  iv,  chs.  v, 
vi;  J.  S.  Nicholson,  Principles  (1893),  bk.  i,  chs.  v,  vii;  F.  A.  Fetter, 
Principles  (191 5),  part  3;  R.  Mayo-Smith,  Statistics  and  Economics 
(1899),  ch.  iii;  K.  Marx,  Capital  (trans,  by  Aveling,  1887),  chs.  xiii-xiv; 
W.  S.  Jevons,  Theory  (191 1),  ch.  v;  J.  A.  Hobson,  Evolution  of  Modern 
Capitalism  (191 2),  ch.  x;  Lord  Leverhulme,  The  Six  Hours  Day 
(1919);  S.  and  B.  Webb,  Industrial  Democracy  (1904),  part  2,  ch.  vi; 
L.  Brentano  (trans,  by  Arnold),  Hours  and  Wages  in  Relation  to  Pro- 
duction (1894);  J.  Schoenhof,  The  Economy  of  High  Wages  (1892); 
E.  S.  Meade,  Trust  Finance  (1903),  ch.  iv;  Thirteenth  Annual  Report  of 
the  Commissioner  of  Labor  on  Hand  and  Machine  Labor  (1899);  U.  S. 
Twelfth  Census,  VII,  Manufactures,  part  i;  F.  W.  Taussig,  Principles 
(1911),  ch.  iii. 

124.   Meaning  of  Labor 

By  labor  is  meant  the  putting  forth  of  human  exertion.  The 
attempt  to  divide  it  into  the  categories  of  physical  and  mental 
labor  is  not  strictly  accurate.  The  labor  of  even  the  most  uhm 
skilled  workman  calls  for  the  exercise  of  certain  mental  quali-i 
ties,  like  attention,  memory  and  prudence;  while  on  the  other 
hand  the  intellectual  effort  of  the  great  captain  of  industry  is 
associated  with  the  expenditure  of  a  certain  amount  of  waste i 
of  tissue.  From  the  lowest  to  the  highest  is  a  difference  in  de- 
gree. Ordinary  day  laborers  disclose  almost  endless  varieties  oli 
ability,  skill  and  technical  efficiency,  the  result  of  the  education 
of  hand  and  brain;  among  the  employers  the  differences  iri 
capacity  and  energy  are  no  less  marked.  Labor  runs  through 
the  whole  gamut,  from  worthlessness  to  highest  efficiency,  frorr 
the   mere    mechanical   repetition    of   the   simplest   act   to   the 

288  ' 


§  125]  Cost  of  Labor  289 

planning   of   the   most   subtle   and   elaborate   business   scheme 
or  intellectual  result. 

Under  present  social  conditions  we  distinguish  between 
laborers  and  capitalists,  between  workmen  and  employers.  As 
a  rough  classification  available  for  many  practical  purposes, 
this  is  defensible.  From  the  point  of  view  of  production,  how- 
ever, it  is  not  wholly  adequate.  Labor  is  undoubtedly  different 
from  capital,  but  the  owner  of  capital  may  also  labor.  The 
employer  is  not  the  same  as  the  employee,  but  he  may  work  as 
hard  and  his  contribution  to  the  value  of  the  product  may 
be  even  more  important.  It  is  hence  a  fateful  error  to  con- 
fine the  term  labor,  as  virtually  do  the  socialists,  to  manual 
labor,  and  to  maintain  that  all  wealth  is  created  by  labor,  with 
the  implication  that  all  other  shares  in  distribution  are  a  de- 
falcation from  wages  and  therefore  a  robbery  of  the  workman. 
Entirely  apart  from  the  fact  that  there  are  other  factors  of  pro- 
duction, the  contention  overlooks  the  labor  of  organization  and 
enterprise,  of  correlating  the  scattered  elements  of  produc- 
tion and  of  adjusting  the  supply  to  the  varied  demands  of  a 
complex  market.  Such  labor  has  become  under  prevalent 
conditions  of  even  greater  value  to  society  than  the  mere 
manipulation  of  the  tools.  A  modern  railway  president  or 
head  of  a  great  industrial  trust  often  receives  a  salary  equal  to 
that  of  several  hundred  of  his  workmen,  and  larger  than  that  of 
the  President  of  the  United  States.  The  work  may  not  be  so 
irksome  as  that  of  the  day  laborer,  but  it  may  be  worth  far 
more  to  society,  because  its  contribution  to  the  product  is  so 
much  greater.  The  real  value  of  labor  depends  not  upon  the 
conditions  of  employment  but  upon  the  results  of  activity. 

125.    Cost  of  Labor 

Economic  production  implies  the  turning  out  of  the  greatest 

product  with  the  least  cost.     So  far  as  the  wages  of  labor  form 

an  element  of  cost,  it  would  seem  to  follow  that  low  wages  or 

cheap  labor  is  a  necessary  condition  of  low  cost.     Before  ac- 

19 


290  Labor  [§  125 

cepting  this  ostensibly  self-evident  proposition,  however,  it  is 
necessary  to  pursue  the  analysis  further. 

In  the  first  place,  we  must  draw  a  distinction  between  the 
individual  and  the  social  point  of  view.  Even  if  it  were  true 
that  in  a  particular  industry  low  wages  denoted  low  cost,  it 
would  not  follow  that  it  is  also  true  from  the  point  of  view  of 
society.  Since  production  is  conditioned  by  consumption, 
there  can  be  no  permanent  increase  in  output  without  an  in- 
crease in  demand.  The  effective  demand,  however,  depends 
upon  the  income  of  the  consumers.  In  any  community  the 
great  mass  of  the  consumers  consists  of  the  laborers.  The 
lower  the  level  of  wages,  therefore,  the  more  restricted  will  be 
the  total  demand  for  the  national  products  in  general  and  the 
slighter  the  chance  of  reducing  cost  by  expanding  the  market. 
Low  wages  which  mean  low  cost  in  some  industries  may  thus 
indirectly  prevent  a  reduction  of  cost  in  other  industries. 
Where  a  particular  set  of  industries  is  manufacturing  almost 
wholly  for  the  foreign  market,  the  effect  may  not  be  so  obvious; 
but  since,  as  in  all  international  trade,  imports  must  ultimately 
pay  for  exports,  the  volume  of  the  foreign  trade  finally  depends 
on  the  capacity  of  the  domestic  consumer  to  utilize  what  is 
brought  in.  Thus  even  the  prosperity  of  the  export  industries 
may  be  purchased  at  the  expense  of  the  other  branches  of  pro- 
duction. Irrespective  of  the  general  question  of  the  social 
desirability  of  high  wages  for  the  laborer  himself,  it  is  clear 
therefore  that  when  we  regard  public  wealth  in  general,  low 
wages  do  not  necessarily  mean  low  cost.  The  low  cost  in 
some  industries  may  be  outweighed  by  the  higher  cost  due 
to  the  lack  of  consumption  or  restricted  market  in  other 
industries. 

In  the  second  place,  in  any  single  industry  low  wages  do  not 
necessarily  mean  low  cost.  The  real  cost  of  labor  is  to  be 
measured  by  its  productive  efficiency.  Just  as  the  hundred- 
thousand-dollar  railway  president  is  cheap  because  an  inferior 
and  low-priced  substitute  would  botch  matters  and  increase 


^  125]  Cost  of  Labor  291 

expenses,  so  in  the  case  of  the  ordinary  wage-earner  the  real 
lost  is  to  be  measured  by  the  ratio  of  wages  to  the  product  of 
labor.  In  the  Phihppines  the  contractors  iind  it  in  the  end 
cheaper  to  hire  the  Chinamen  in  preference  to  the  natives,  al- 
though the  former  command  larger  wages;  in  the  Southern 
cotton  factories  the  white  laborer  is  found  more  advantageous 
than  the  negro  factory  hand,  who  can  be  hired  at  a  materially 
lower  wage.  Furthermore,  in  the  same  industry  and  with  the 
same  workmen  neither  an  increase  of  wages  nor  a  curtailment 
uf  labor  time  necessarily  augments  cost.  Where  a  reduction  of ' 
hours  or  an  increase  of  wages  succeeds  in  enhancing  energy, 
care  and  sobriety,  the  output  may  be  greater  than  before.  Es- 
pecially where  fine  machinery  is  used  and  a  high  grade  of 
iateUigence  is  required  to  secure  the  best  results,  we  often  find 
a  true  economy  in  high  wages  and  a  lower  cost  in  shorter  hours. 
The  relatively  cheapest  goods  which  are  produced  in  the  United 
States  and  which  successfully  compete  in  foreign  markets  with 
the  products  of  low-priced  labor  are  certain  iron  and  steel  manu- 
factures, boots  and  shoes,  clocks  and  the  like,  where  the  wage- 
scale  is  notoriously  the  highest. 

Of  course  it  does  not  follow  that  every  increase  of  wages 
or  reduction  of  hours  will  lower  cost.  There  is  at  every  period 
and  in  every  industry  a  limit  beyond  which  the  increase  of 
efiiciency  will  be  overtaken  by  the  greater  outlay,  and  it  ic 
quite  possible  that  there  may  be  no  increased  efficiency  at  all. 
In  such  cases  higher  wages  do  indeed  mean  greater  cost.  The 
mere  fact,  however,  that  goods  sell  at  low  prices  tells  us  noth- 
ing as  to  the  comparative  rate  of  wages  in  that  industry.  The 
cheapness  of  so-called  white  goods  in  a  department  store  may  be 
due  to  the  low-priced  labor  in  the  sweat-shops;  the  cheapness 
of  a  Waltham  watch  may  be  compatible  with  the  very  highest 
wage-scale.  So  far  as  labor  is  a  factor  of  production,  cost  de- 
pends not  merely  upon  wages,  but  upon  wages  as  compared  with 
output.  Under  certain  conditions  there  is  a  true  economy  in 
high  wages;   the  more  a  workman  is  paid,  the  less  he  may  cost. 


292  Labor  [§  126 

126.  Efficiency  of  Labor 

Since  the  ultimate  factor  in  the  relation  between  labor  and 
cost  is  productive  efficiency,  the  problem  of  increasing  the 
efficiency  of  labor  is  of  paramount  importance.  The  older 
economists  were  fond  of  emphasizing  the  dependence  of  the 
demand  for  labor  upon  capital.  While  their  analysis  was  in 
many  respects  valuable,  they  overlooked  the  independent  power 
of  labor  to  contribute  to  its  own  uplifting  through  an  increase 
of  efficiency.  It  is  precisely  here  that  the  economic  effects  of 
education  and  leisure  as  well  as  of  social  and  political  progress 
mean  so  much  to  the  community.  In  the  commercial  warfare 
that  is  being  waged  between  nations  to-day,  education  is  recog- 
nized as  a  potent  weapon.  In  the  United  States  the  old-time 
prejudice  against  the  college-trained  business  man  has  given 
way  to  the  recognition  of  his  superiority;  technical  and  com- 
mercial schools  of  all  grades  are  being  multiplied,  and  even 
the  primary  and  secondary  institutions  are  adapting  their 
curricula  more  successfully  to  the  needs  of  the  ordinary  man. 
The  gist  of  the  negro  problem  in  the  South  is  seen  by  all  care- 
ful thinkers  to  consist  in  the  increase  of  productive  efficiency 
through  an  appropriate  education  of  the  negro.  The  hope  for 
the  Filipino  is  to  be  found  in  the  possibility  of  training  him 
to  habits  of  orderly  and  consecutive  work.  With  him,  as  with 
the  laborer  at  home,  the  significance  of  a  higher  standard  of 
life  —  which  is  only  another  way  of  stating  the  basis  of  greater 
productivity  —  is  to  be  found  not  only  in  the  domain  of  dis- 
tribution and  consumption  but  in  that  of  production.  The 
finer  the  tool,  the  greater  will  be  the  product;  when  the  tool 
consists  of  human  energy,  we  have  not  only  a  greater  product, 
but  a  greater  capacity  in  the  human  being  to  utilize  the  product. 
The  short-sighted  employer  to-day  is  concerned  only  in  secur- 
ing the  ostensibly  cheapest  workman  and  in  driving  him  to  the 
utmost;  the  long-sighted  employer  finds  it  profitable  not  only  to 
pay  fair  wages  for  moderate  hours,  but  to  surround  his  workmen 


§  127]  Advantages  of  Division  293 

by  an  environment  of  cleanliness,  comfort  and  attractiveness, 
with  provision  for  rest,  recreation  and  education.  No  one  who 
attended  the  St.  Louis  Exposition  in  1904  could  have  failed  to 
be  struck  by  the  exhibits  of  the  Westinghouse  Company  of 
Pittsburg  and  of  the  National  Cash  Register  Company  of  Day- 
ton, with  the  remarkable  arrangements  for  the  welfare  of  their 
workpeople.  Yet  it  can  scarcely  be  doubted  that  it  is  "good 
business"  on  the  part  of  the  employers,  and  that  all  these  seem- 
ingly needless  and  sentimental  expenditures  really  involve  a 
lowering  of  cost  of  production  through  enhanced  efi&ciency  of 
labor. 

We  thus  see  the  close  interrelation  between  production  and 
civilization.  Not  only  is  a  lowering  of  cost  the  basic  condition 
of  increasing  wealth  and  progress,  but  the  physical,  moral  and 
intellectual  advance  of  society  inevitably  reacts  upon  the  indi- 
vidual and  renders  him  a  more  capable  and  efl&cient  agent  of 
production.  State  and  church,  science  and  art,  have  their 
deep  economic  significance.  Progress  is  at  once  a  result  and 
a  cause.  The  true  reduction  of  labor  cost  of  permanent  im- 
portance is  that  caused  by  increased  efficiency.  The  more  of 
a  man  a  laborer  is,  the  better  tool  he  becomes.  Whatever 
society  does  to  improve  the  individual  will  be  more  than  re- 
paid by  an  augmented  production  of  wealth. 

127.  Nature  and  Advantages  of  Division  of  Labor 

In  the  progress  of  efficiency  perhaps  the  greatest  factor  has 
been  the  principle  of  specialization  or  division  of  labor.  In 
its  deepest  aspects  it  is  one  side  of  the  biological  law  discovered 
by  von  Baer  and  elaborated  by  Herbert  Spencer,  — Athc  growth 
of  all  life  from  uniformity  to  multiformity,  from  an  incoherent 
homogeneity  to  a  coherent  heterogeneity.  \  From  the  economic 
point  of  view  division  of  labor  may  be  put  into  four  categories, 
—  the  social,  the  industrial,  the  technical  and  the  territorial 
division  of  labor. 

(i)  The  earliest   illustration  of  the  social  division  of  labor 


294  Labor  [§  127 

is  the  differentiation  of  economic  function  between  man  and 
woman.  In  aboriginal  society  certain  kinds  of  work  were 
assigned  exclusively  to  the  female.  We  have  seen  the  influ- 
ence of  women's  work  upon  the  evolution  of  the  later  economic 
stages.  Even  to-day,  when  all  careers  are  open  to  women, 
there  is.  a  natural  tendency  for  female  labor  to  concentrate 
itself  in  those  groups  where  women  possess  a  peculiar  efficiency 
and  where  there  is  the  least  possible  competition  with  men. 

Apart  from  sex  cleavage  the  earliest  example  of  differentiation 
of  function  was  through  the  formation  of  social  classes.  At 
first  every  one  had  to  fight  to  secure  his  food  and  fight  to  retain 
what  he  had  secured.  The  separation  of  a  permanent  mili- 
tary class  from  the  industrial  group  was  a  great  step  in  the 
efficiency  of  each;  it  is  not  yet  found  in  even  so  comparatively 
developed  a  society  as  that  of  the  American  Indian.  The 
development  of  a  priestly  class,  again,  although  of  chief  impor- 
tance from  the  social  and  religious  point  of  view,  had  a  note- 
worthy economic  effect  in  that  it  permitted  the  industrial  class 
to  devote  itself  more  unremittingly  to  the  daily  tasks  of  produc- 
tion without  giving  so  much  of  its  time  to  the  independent 
propitiation  of  the  malevolent  spirits.  The  priests  were  in 
truth  a  labor-saving  device. 

It  took  ages  for  the  originally  homogeneous  industrial  group 
to  split  up  into  great  classes.  Even  after  centuries  of  prog- 
ress the  husbandman's  family  not  only  worked  up  the  raw 
material  into  roughly  finished  products,  but  exchanged  super- 
fluities with  their  neighbors.  The  cultivator  was  a  handicrafts- 
man and  a  trader,  as  he  is  still  in  part  to-day  on  the  American 
frontier.  An  independent  class  of  traders  was  slowly  differ- 
entiated, and  with  the  originaUy  greater  importance  of  extra- 
tribal  commerce  the  traders  were  usually  the  aristocrats.  It 
is  only  where  economic  conditions  were  inimical  to  commerce 
and  engendered  the  predominance  of  a  land-owning  aristoc- 
racy as  in  some  of  the  feudal  states  of  mediaeval  Europe  and 
Japan,  that  we  find  a  contemptuous  attitude  toward  trade,  and 


§  127]  Advantages  of  Division  295 

especially  toward  the  small  trader,  who  was  often  at  the  same 
time  a  petty  craftsman.  Finally,  the  artisans  are  separated 
from  both  farmers  and  traders,  and  we  notice  the  development 
of  the  industrial  class  in  the  narrower  sense  of  the  term,  as 
distinguished  from  the  agricultural  and  commercial  classes. 
With  every  step  in  the  progress  of  society  we  have  a  further 
division  of  labor  within  each  class  until  we  reach  the  modern 
bewildering  complexity  of  occupations  and  professions. 

(2)  Just  as  the  social  division  of  labor  has  denoted  increased 
efficiency  of  each  group,  so  within  the  sub-groups  we  find  the 
second  form  of  division  of  labor,  which  may  be  called  industrial 
specialization.  In  the  textile  industry,  for  instance,  certain 
mills  manufacture  only  yarns;  others  do  nothing  but  weave 
yarns  into  cloth;  and  still  others  merely  dye  and  finish  the 
product  of  yarn-spinning  and  weaving  mills.  In  New  England 
there  are. shoe  factories  which  make  only  uppers"  and  others 
which  produce  nothing  but  "findings"  (counters,  shanks  and 
heel-stiff eners).  In  the  glass  industry  large  establishments 
turn  out  only  one  kind  of  bottle.  Some  branches  have  even 
become  so  completely  specialized  that  there  are  factories,  as 
in  the  bicycle  and  electrical  supply  industries,  where  nothing 
is  done  but  assemble  the  parts  of  a  machine  or  instrument 
that  are  made  in  other  establishments.  The  advantages  of 
this  kind  of  specialization  are  numerous  and  obvious. 

(3)  Thirdly,  we  find  within  each  particular  business  enter- 
prise an  increasing  separation  of  industrial  functions  known 
as  the  technical  division  of  labor.  This  is  a  specialization  of 
process  within  the  same  establishment  rather  than  a  specializa- 
tion in  diS'erent  establishments.  It  may  also  be  declared  to 
be  a  specialization  among  workmen  in  contrast  to  the  indus- 
trial division  of  labor  which  is  a  specialization  among  employ- 
ers. It  is  clear  that  specialization  of  the  workman  saves  time 
both  in  preparation  for  the  trade  and  in  execution  of  the  task, 
while  the  greater  familiarit)'  with  a  single  process  vastly  aug- 
ments his  dexterity.     It  is  no  less  obvious  that  the  greater  the 


296  Labor  [§  127 

specialization  the  greater  will  be  the  chance  of  the  right  man 
falling  into  the  right  place,  thus  facilitating  the  adaptation 
of  means  to  end.  A  trip  through  any  modern  factory  will 
disclose  tens  —  nay,  even  hundreds  —  of  separate  processes 
designed  to  turn  out  a  product  which  in  former  times  was  en- 
tirely made  by  a  single  individual.  A  good  example  of  such 
a  subdivision  of  labor,  resting  still  upon  human  labor  force 
alone,  is  to  be  found  in  the  manufacture  of  ready-made  coats, 
which  is  now  in  New  York  divided  into  no  less  than  thirty- 
nine  distinct  processes.^ 

It  is,  however,  in  cases  where  ample  technical  auxiliaries  are 
used  that  we  find  the  most  minute  subdivision  of  labor.  Hu- 
man energy  can  then  be  reduced  to  the  repetition  of  a  single 
act  like  a  thrust,  a  pull,  a  stroke  or  some  other  simple  manipu- 
lation of  a  machine.  The  reduction  of  cost  often  progresses 
in  a  far  greater  ratio  than  the  increase  in  the  number  of  pro- 
cesses, for  we  have  here  to  deal  not  only  with  the  enhanced 
dexterity  of  the  workman  but  with  the  almost  endless  suc- 
cession of  labor-saving  devices.  To  make  a  shoe  in  some  New 
England  factories  requires  173  different  operations,  each  con- 
ducted by  a  class  of  laborers  with  a  special  name.  The  manu- 
facture of  a  fine  watch  calls  for  no  less  than  1,088  different  sets 
of  workmen  (not  including  the  operations  of  furnishing  the 
power),  each  using  a  different  kind  of  machine.     The  saving  in 

1  These  thirty-nine  classes  of  workmen  are:  i.  Fitter;  2.  Pocket- 
maker;  3.  Canvas-baster;  4.  Lapel-padder;  5.  Bar-tacker;  6.  Seam- 
presser;  7.  Lining-maker;  8.  Lining-operator;  9.  Sleeve-maker;  10. 
Lining-presser;  11.  Sleeve-presser;  12.  Collar-padder;  13.  Shaper; 
14.  Tape-fuller;  15.  Lining-baster;  16.  Operator;  17.  Pressor;  18. 
Edge-cutter;  19.  Edge-baster;  20.  Shoulder-lining  baster;  21  Shoul- 
der operator;  22.  Edge  sleeve-baster;  23.  Collar-baster;  24.  Sleeve- 
presser;  25.  Joiner  of  collar  to  lapel;  26.  Armhole-baster;  27.  Sleeve- 
sewing  operator;  28.  Garment-examiner;  29  Collar-finisher;  30.  Arm- 
hole-lining  finisher;  31.  Basting-puller;  32.  Edge-presser;  33.  Button- 
hole-cutter; 34.  Buttonhole-maker;  35.  Hanger-sewer;  36.  Presser  of 
entire  coat;  37.  Button-marker;    38.  Button-sewer;    39.  Busheller. 


HAND  AND   MACHINE  LABOR. 
NUMBER  OF  HOURS   WORKED  UNDER  EACH  METHOD  IN  PRODUCING  SELECTED  UNITS. 


DESCRIPTION  OF  UNIT. 


YEAR 
PRODUCED. 


NUMBER  OF  HOURS  WORKED. 


AGRICULTURE. 

BARLEY     100  BUSHELS. 
CARROTS    10  TONS  LONG  ORANGE. 

rOQN     50  BUSHELS,  shelled;  STALKS,   HUSKS,      ■ 
^\jn\\     ^f^p  BLADES  CUT  INTO  FODDER. 

CORN   50  BUSHELS,   husked;  STALKS  LEFT  IN  FIELD. 

COTTON  SEED  COTTON,  1,000  POUNDS. 

HAY     HARVESTING  AND  BALING  8  TONS  TIMOTHY. 

OATS    160  BUSHELS. 

PEASE    50  BUSHELS. 

POTATOES   500  BUSHELS. 

RICE    10.000  POUNDS  ROUGH. 

RYE    100  BUSHELS. 

STRAWBERRIES  500  quarts. 
SWEET  POTATOES  50  bushels. 
TOMATOES  100  bushels. 

VVHEAT    60  BUSHELS. 

MINING. 

COAL     50  TONS  BITUMINOUS. 

QUARRYING. 
DRILLING  GRANITE  ^i^^Z^^ki^'"^ 
DRILLING  ROCK  1,--^^?,^ ^Jc'k""  '"'"' 

GRANITE  QUARRYING  50  CUBIC  FEET. 

LIMESTONE  quarrying  loo  tons. 
MARBLE  quarrying  72  cubic  feet. 

RED  ROCK    QUARRYING  40  TONS. 


TRANSPORTATION,  Etc. 

,   „     _  TRANSFERRING  6.000  BUSHELS 

LOADING    GRAIN  WHEAT  FROM  STORAGE  BINS  OR 
ELAVATORS  TO  VESSEL. 

LOADING  ORE  loading  100 tons  iron  ore  on  cars. 

TRANSFERRING  200  TONS  FROM 

UNLOADING  COAL  canal  boats  to  bins 

400  FEET  DISTANT. 

UNLOADING  COTTON  transferring  200  bales 

FROM  VESSEL  TO  DOCK. 


1829-30 
1895-91; 


1805 

1891 

1855 

1894 

1811 

1895 

1860 

1891 

1830 

1893 

1856 

1895 

1866 

1895 

1870 

1895 

1847-48 

1894-95 

1871 -72 

1894-95 

1868 

1895 

1870 

1895 

1829-30 

1895-96 


1897 
1897 
1896 
1896 
1890 
1896 
1866 
1897 
1876 
1896 
1896 
1896 


1853 
1890 
1891 
18U6 

1859 
189G 
1800 
1896 


md, 


Tv::iV       I 


^l^g^^^^^ 


28191 


TSITT 


=^j^i!ii«;«;;j»^^!?-:^;^jj;^fe^.-^ 


;iL'  .•.;',  • 


TSOO" 


^ 


"&>:,;  I 


-^SXP^ 


251. 9J 


21li.51  :.  >S??»si$f :^ 


I! 


1122^^^^ 


air 


Tinoa-.  -  <-^^yyj 


IKSt^fi- 


I^S^ 


'l78..yi"'^N^^^^^ 


SHo" 


^I^ 


[3S3:^^^^^ 


n..-'.s.        I 


'I'SS-o?:: 


^"■, 

•<!U5.3>                               1 

W).OI) 

1 

.^,-  -^  ^J^jJ^i^iJ^-ilOo.^^^  -*  K^i*j*SJ*) 

.'.S.(,o  1 

200  (Ml                             ! 

IL/h 

-iUlOO 

-iW-OO         c*J*SJ*5*iJ5Jja 

'  .    -0        I 


From  U.S.  Labor  Bulletin  54 


HAND  AND    MACHINE  LABOR. 
NUMBER  OF  HOURS    WORKED  UNDER    EACH  METHOD 
IN  PRODUCING  SELECTED  UNITS  OF  MANUFACTURE. 


DESCRIPTION  OF  UNIT. 


NUMBER  OF  HOURS  WORKED.    I  I   """'' 

I Zl    MACHINI 


PITCHFORKS    50  PITCHFORKS.  12  INCH   TINES 
PLOW     1  LANDSIDE  PLOW, OAK  BEAMS  AND  HANDLES. 
BAGS    6,000  COTTON  FLOUR  SACKS. 

Dl    AMl/nrir,LCC    12  CROWN    LEDGERS,   8 '^X  uJ^  INCHES, 
BLANKBOOKS    400  pAQES,  FULL  SHEEP. 


CHDFC;  '"'  PAIRS  MEN'S  FINE  GRADE,   CALF,  WELT, 
anuta  ^^g^  SHOES,   SINGLE  SOLES,  SOFT  BOX  TOES. 
RDXF'^    1.000  STRAWBOARD,   PAPER-COVERED, 
DUAC3    SHOE  BOXES,   ll/i^  6  X  J/glNCHES. 

CRACKERS    1,000  POUNDS  GRAHAM  CRACKERS,    PACKED. 
_     „„,-_     200  YARDS  INGRAIN  CARPET,  COTTON  WARP, 
CARPET      WOOL  FILLING,   1038  ENDS,   26  PICKS  PER  INCH 

1   ELLIPTIC  SPRING,  LEATHER  TOP  BUGGY, 
^AnniA/-~rT     PIANO  BODY,   DROPPED  AXLES, 
l^AKKIAIjt     BANDED  HUBS,   CLOTH  TRIMMINGS. 

10  GOLD  HUNTING  WATCH 
vA/AX(~u    i^ACcrc  CASES,    18  SIZE,  ENGINE  TURNED, 
VVAIV^n    l-A5tS  BARLEYCORN  SHEIlD    PATTERN. 
1  KEY-WIND,  BRASS 

WATCH   MOVEMENTS  hunting  watch  movement, 

13  SIZE,  FULL  PLATE. 

rriMRt;  '  gross  horn  dressing  combs,  7  x  1,'^  inches, 

OUWItSb  COARSE  AND  FINE  TEETH  1,',  INCHES. 

BARRELS  100  flour  barrels,  patent  hoops. 

ROPE    300  POUNDS  3/INCH  HEMP  BALING  ROPE 

Pl->pcpyc    1   DOZEN  MEDIUM  SATEEN  CORSETS, 
V.,UK3C  I  i    ,^  EYELETS  IN  BLACK. 

HATCHETS 


P     .    _-p-    PRINTING  AND  BINDING  4.000  PAMPHLETS, 
PAMPHLt  I  b    32  PAGES,  3-8  X  5^4  INCHES. 
.     „     _.      __    FOLDING,  STITCHING,   AND  COVERING  2,000 

MAGAZINES  copies  96-page  magazine,  e^^a  x  gJ^ inches 
NEWSPAPERS    printing.and  folding  36,ooo .pages. 

I    ITWOrUiPHV    PRINTING  1,000  sheets  ART  work, 
LI  I  MUUKAri-lY    19  X  23  INCHES,   6  COLORS. 

TYPESETTING  100,000  ems,  newspaper  work. 

100  electrotype  plates, 
ELECTROTYPING  8,^x7)4  INCHES. 

_  M^D.wiM^   1  WOODCUT.   7V  X  9  INCHES,  SAME 
tN(jKAVINL>   PATTERN  UNDER  EACH  METHOD. 

ENVELOPES  50,000  NO.  6^  plmn  white  envelopes. 
BUTTER  500  pounds,  in  tubs. 

1   DOZEN   WHITE  muslin  SHIRTS,  PLAITED  LINEN 
SHIRTS  BOSOMS,   LINEN  COVERED  COLLARS  AND  CUFFS 

ATTACHED. 
I   /~,l  iMr-cc  '2  O*!^  FRAME,   ROUND  END.   PLUSH  COVERED 
LOLINUtb   LOUNGES,    69  X  23  INCHES,  ANTIQUE  FINISH. 

ijAOMi-c-c-     'SET  DOUBLE  COACH  HARNESS, 
HAKNtbb    TRACES  10  STITCHES  PER  INCH. 

GRANITE    DRESSING  150  SQUARE  FEET. 


1896 
1870 
18'JG 
ISCO 

isui; 

IS'Ji 


isa.i 

18«7 
ISUJ 
1858 
1S'J5 
1800 
1895 
1865 
18'J3 
1800 
1897 

1862 
1896 
1815 
1895 
1895 
1895 
1875 
1896 
1856 
1896 
1&55 
18U5 
1889 


1895 
1867 
1896 
1895 
1895 
1865 
1895 
1883 
1895 
1855 
1896 
1866 
1897 
1853 
1895 
1860 
1891 
1800 
1895 
1895 
1891 


_4sj!3 


..i'"-^'^  '' 


Brrr 


-KK-.niK- 

:  <;i*i45*S*»S*a 

.-.'1  QK      1 

1-Ii  .ill                                     ! 

auiU 

'!>;>«■  on I 

34.511 1 


J19UU 


35.  .^5 1 


Wn4:t|»ijj:tj:^jijy^j^ 


12148 


ISCair 


,,.,      i3t  a-.:  \'     -1 


;iio.w),  ,    .^-^f^^ 


3}OiE 


USET 


ri.u.s 


i^ 


L-.ti  oo      ■  ■  -k^^\^^^;j^?^ 


ZMMl 


36.111)1 


Ui).5l)     ,,.'1 


lil78 


la-v.o" I 


H68 


333321^3 


.^i.M)_ 


m:!)ommimim-u 


From  U.S.  Labor  BuJJttoxi^ 


§  127]  Advantages  of  Division  297 

cost  due  to  the  introduction  of  machinery  can  be  illustrated  in 
the  jewelry  and  iron  business;  under  the  machine  method  1,020 
gold  filigree  shells  for  cuff  buttons  can  be  completed  in  the  same 
time  as  one  by  the  hand  method;  in  the  production  of  screws 
where  one  man  can  operate  from  six  to  twelve  machines  the 
ratio  of  machine  to  hand  product  is  4,491  to  i.  In  the  historic 
example  of  pin-making,  where  a  single  workman  unaided  could 
originally  turn  out  only  a  few  pins  a  day,  but  where  in  Adam 
Smith's  time  his  product  was  five  thousand  pins  a  day,  the 
daily  product  per  workman  is  now  about  fifteen  millions  of  pins, 
complete  and  stuck  in  the  paper.  The  tables  opposite  pages 
296  and  297  will  illustrate  the  contrast  between  hand  and 
machine  labor  in  various  occupations  in  the  United  States. 
It  is  obvious  that  the  technical  division  of  labor  is  dependent 
on  the  existence  of  a  vast  market.  The  mass  production,  which 
results  from  the  improvement  of  technique  through  division  of 
labor,  and  the  substitution  of  machine  for  hand  methods,  is 
profitable  only  when  the  demand  for  a  cheap  product  is  so  elas- 
tic as  to  be  susceptible  of  great  increase.  Division  of  labor  and 
increase  of  output  are  thus  correlated.  Each  is  in  turn  the 
result  of  the  other. 

(4)  Fourthly,  the  principle  may  assume  the  form  of  local- 
ization or  territorial  division  of  labor.  In  large  cities  we  find 
the  most  important  wholesale  houses  in  any  line  of  business 
assembled  in  districts  by  themselves.  In  nations  we  find 
various  industries  congregated  to  a  large  extent  in  localities 
which  possess  some  peculiar  advantages,  such  as  proximity  to 
raw  materials,  water  power  or  markets,  favorable  climate,  cheap 
labor,  and  supply  of  capital  or  credit  facilities.  In  the  world 
at  large  the  principle  of  the  territorial  or  geographical  division 
of  labor  is  the  chief  foundation  for  the  free  trade  argument. 
By  allowing  each  section  to  produce  that  for  which  it  is  best 
fitted,  we  shall  manifestly  secure  the  greatest  and  the  cheapest, 
production.  In  all  cases,  whether  we  have  social,  industrial, 
technical  or   territorial  division  of  labor,   the   result  is  an   en- 


298  Labor  [§  128 

hanced   efficiency  of    labor    and    a    proportionate    increase    of 

wealth. 

128.   Defects  of  Division  of  Labor 

While  the  principle  of  the  division  of  labor  is  undoubtedly- 
salutary,  there  are  certain  dangers  which  must  not  be  over- 
looked. These  are  the  risks  involved  in  specialization  of  any 
kind.  A  great  scientist  has  been  described  as  one  who  knows 
something  about  everything  and  everything  about  something. 
Specialization  in  such  cases  is  illuminating.  Many  specialists, 
however,  know  a  great  deal  about  some  one  thing  and  nothing 
about  anything  else.  Specialization  here  is  narrowing  and 
even  dangerous,  because  it  tends  to  prevent  a  broad  power  of 
successful  generalization.  In  the  economic  domain  the  risk  is 
the  same.  In  the  social  division  of  labor  a  particular  sub- 
group may  pursue  its  own  interests  so  closely  as  to  subordinate 
to  them  the  public  interest,  thus  preventing  an  even  and  well- 
rounded  economic  development.  In  the  territorial  division  of 
labor  the  dependence  of  a  section  or  country  upon  one  par- 
ticular product  may  be  perilous  in  time  of  some  suddenly  en- 
forced cessation  of  production,  as  in  the  case  of  the  potato 
famine  in  Ireland  in  the  forties,  or  it  may  check  progress,  as 
in  the  case  of  the  one-crop  system  or  the  sole  reliance  of  a 
country  upon  agriculture.  In  the  technical  division  of  labor 
the  confining  of  the  individual  workman  to  the  mechanical  repe- 
tition of  a  simple  act  may  tend  to  make  him  a  machine  rather 
than  a  man,  and  to  stifle  and  repress  all  the  powers  of  initia- 
tive. This  is  in  fact  the  one  great  indictment  brought  against 
the  modern  industrial  system. 

The  danger,  however,  can  be  averted.  In  the  social  division 
of  labor  a  developed  sense  of  social  solidarity,  of  business  ethics 
and  of  political  responsibility  will  insure  a  continually  growing 
adaptation  of  the  parts  to  the  whole.  In  the  geographical 
division  of  labor  a  sound  industrial  and  commercial  programme 
will,  as  we  shall  see,  strive  for  a  diversification  of  industry  by 
supplementing,  and  within   certain  limits  altering,  nature.     In 


I 


§  129]  Combination  of  Labor  299 

the  technical  division  of  labor  the  qualities  which  lie  dormant 
during  the  hours  of  work  may  be  awakened  by  a  judicious  ad- 
mixture of  leisure,  and  by  a  different  attitude  toward  the  work 
itself,  which  can  be  brought  about  in  large  measure  by  techni- 
cal and  industrial  education.  If  machine  industry  and  division 
of  labor  simply  brought  to  the  workman  greater  intensity  of 
work,  as  the  socialists  contend,  the  result  would  be  disastrous. 
But  if,  as  is  often  the  case,  the  increased  productivity  brings 
with  it  higher  wages  and  shorter  hours,  the  workman's  Whole 
standard  of  life  may  be  elevated,  and  his  daily  task  need  no 
longer  engross  the  whole  of  his  physical  and  mental  energy. 
Under  proper  leadership  within  his  own  ranks  and  in  those  of 
the  employers,  he  may  be  a  part  of  the  machine,  and  yet  not 
only  remain  a  man  but  become  more  of  a  man  than  before. 
The  highest  grade  of  American  labor  to-day  is  not  the  cobbler 
who  makes  the  whole  shoe,  but  the  specialist  heel-finisher  in 
the  New  England  shoe  factory.  Under  such  conditions,  as 
they  are  disclosed  by  progress  in  the  most  advanced  nations, 
division  of  labor  may  be  a  blessing  instead  of  a  curse,  and 
remain  an  aid  to  production  without  becoming  a  menace  to 
individuality.  This  result,  however,  cannot  be  reached  without 
a  struggle  to  retain  the  use,  while  overcoming  the  misuse,  of 
what  is  an  essentially  beneficent  principle. 

129.   Combination  of  Labor 

Division  of  labor  does  not  describe  the  whole  of  the  process. 
To  be  effective  it  must  be  supplemented  by  the  combination 
of  labor.     This  also  assumed  several  forms. 

(i)  First,  we  have  the  combination  or  co-operation  of  labor 
with  another  agent  of  production,  like  capital.  We  have  seen 
that  the  advantages  of  the  technical  division  of  labor  are  most 
signal  when  machinery  is  employed.  Obviously  the  larger  the 
quantity  of  labor  that  is  saved  through  the  aid  of  capital,  the 
higher  will  be  the  productivity  of  each  remaining  unit  of  labor; 
the  more  complex  the  entire  process,  the  simpler  will  be  each 


300  Labor  [§  129 

single  portion.  Without  the  co-operation  of  the  two  factors, 
the  division  would  be  less  minute  and  the  output  less  abundant. 
Modern  division  of  labor  is  largely  the  result  of  the  applica- 
tion of  capital. 

(2)  Secondly,  we  have  the  technical  combination  of  units 
of  labor  with  each  other.  This  combination  may  be  successive 
or  simultaneous.  In  the  so-called  team  system  in  the  clothing 
industry,  for  example,  although  each  set  of  workmen  does  its 
allotted  share,  it  is  most  important  that  they  all  proceed  in 
unison,  so  that  no  set  completes  more  or  less  than  can  be  han- 
dled by  the  next.  Here  we  have  successive  combination.  In 
a  great  steel  foundry  or  rolling  mill,  on  the  other  hand,  each 
detail  of  the  work  may  be  apportioned  to  a  separate  class,  but 
unless  they  all  co-operate  exactly  at  the  critical  moment  the 
product  will  be  worthless.  Here  we  have  simultaneous  com- 
bination. In  both  cases  the  combination  is  effective  because 
of  the  division  of  labor;  or,  better  stated,  the  result  is  due  to 
the  joint  influence  of  combination  and  division. 

(3)  Thirdly,  we  have  the  combination  due  to  the  fullest 
utiHzation,  from  the  outside,  of  the  result  of  each  contribution 
to  the  product.  In  social  division  of  labor  this  is  brought 
about  by  the  principle  of  competition  or  of  societary  control; 
in  territorial  division  of  labor  it  is  produced  by  the  natural 
forces  of  location;  in  technical  division  of  labor  it  is  effected 
by  the  organization  of  industry.  Herein  lies  the  great  role  of 
the  manager  and  employer  of  labor,  —  the  entrepreneur  in  the 
technical  sense.  The  head  of  a  great  department  store  or  of 
a  vast  factory  is  akin  to  a  general.  He  must  be  at  once  bold 
and  prudent,  and  must  look  with  one  eye  to  the  ranks  and 
with  the  other  to  the  enemy,  his  competitor.  He  must  be  full 
of  resources  and  of  foresight.  Above  all,  he  must  not  only 
have  an  army  well  disciplined  down  to  the  smallest  detail,  but 
must  possess  the  capacity  to  take  a  large  view,  massing  his 
forces  at  just  the  time  and  in  just  the  manner  to  be  most 
effective.     In   short,    thorough    organization   and   co-operation 


§  130]  Supply  of  Labor  301 

are  the  secrets  of  industrial  as  of  military  success.  The 
great  leader  is  as  indispensable  in  the  one  career  as  in  the 
other. 

Combination  of  labor  is  thus  the  complement  of  division  of 
labor.  The  most  efficient  use  of  the  one  involves  the  employ- 
ment of  the  other.  Specialization  and  co-operation  are  the 
obverse  and  the  reverse  of  the  same  medal;  they  are  as  neces- 
sary to  a  developed  economic  life  as  are  the  individual  and 
social  elements  to  human  life,  or  the  centripetal  and  centrifugal 
forces  to  all  life. 

130.    Supply  of  Labor 

Since  labor  is  a  productive  agent  that  is  susceptible  of  in- 
crease, it  might  seem  that  the  supply  of  labor  will  in  the  long 
run  respond  to  the  demand,  so  that  there  will  never  be  a  de- 
ficiency or  a  surplus.  The  situation,  however,  is  by  no  means 
so  simple,  even  if  we  confine  our  attention  to  ordinary  labor, 
and  abstract  from  that  for  which  special  education  or  remark- 
able natural  gifts  are  required. 

In  the  first  place,  there  may  be  climatic  or  racial  reasons 
which  restrict  the  supply.  In  the  tropics  it  is  sometimes  diffi- 
cult to  induce  the  natives  to  work  for  any  consideration.  Again, 
under  conditions  of  forced  labor,  the  source  of  supply  may 
dry  up;  the  downfall  of  the  Roman  empire  and  the  decline 
of  prosperity  in  the  South  before  the  war  were  due  to  the  fact 
that  cessation  of  conquests  in  the  one  case  and  the  stoppage 
of  the  African  trade  in  the  other  finally  made  the  slave  too 
expensive,  by  limiting  the  supply.  Even  under  the  modern 
system  of  free  labor  there  may  be  both  artificial  and  natural 
obstacles.  We  prohibit  Chinese  immigration,  although  by  so 
doing  we  retard  the  exploitation  of  the  natural  resources  of 
the  Pacific  slope.  We  prefer  a  more  equable,  even  if  slow, 
development  to  the  rapid  tempo  associated  with  diminished 
opportunities  to  the  American  workman.  A  less  defensible 
restriction  of  supply  is  seen  in  the  short-sighted  policy  of  some 


302  Labor  [§  130 

trade-unions  which,  following  the  example  of  the  mediaeval 
guilds,  seek  to  secure  monopoly  returns  by  interposing  all 
manner  of  obstacles  to  membership.  Such  methods,  however, 
involve  a  restriction  in  the  supply  of  special  kinds  of  labor 
rather  than  of  the  general  labor  force,  and  invariably  react 
upon  the  workmen  outside  of  the  particular  unions.  Finally, 
a  natural  obstacle  to  the  free  adjustment  of  the  supply  is  seen 
in  the  case  of  the  so-called  seasonal  demand.  There  are  occu- 
pations where  labor  is  needed  only  at  stated  intervals,  as  for 
instance  in  farming  at  harvest  or  vintage  time.  Yet  the  laborer 
must  live  during  the  whole  year.  Whenever  economic  con- 
ditions do  not  permit  a  scale  of  wages  sufficiently  high  to  sup- 
port the  workman  during  the  intervals  of  non-employment,  we 
find  these  periodical  complaints  of  scarcity  of  labor. 

On  the  other  hand,  a  striking  example  of  the  relative  over- 
supply  of  labor  is  afforded  by  the  substitution  of  machine  for 
hand  labor.  The  introduction  of  machinery,  however,  does 
not  mean  a  diminution  in  ultimate  demand.  For  the  decrease 
in  cost  and  price  due  to  machine  methods  leads  to  such  an 
enhancement  of  output  that  even  with  a  relative  falling  off 
in  the  number  of  laborers  there  will  ultimately  be  an  increase 
in  the  total  aggregate  of  laborers  employed.  The  replacing  of 
the  stage-coach  by  the  railway  finally  led  to  a  vast  increase  of 
laborers  at  higher  wages,  coupled  with  a  service  at  lower  cost. 
This  result  will  of  course  ensue  only  when  the  increased  profits 
due  to  the  new  machinery  are  saved  and  invested  in  new  cap- 
ital which  gives  employment  to  more  laborers.  If  the  profits 
are  wasted  instead  of  being  saved,  a  new  machinery  will  be  of 
no  advantage  to  the  laborer.  In  point  of  fact,  however,  the 
profits  are  normally  saved.  The  immediate  result  is  often  a 
temporary  oversupply  in  the  particular  trade  and  the  discharge 
of  workmen  who  for  the  time  being,  and  until  they  finally 
drift  to  the  new  openings,  swell  the  ranks  of  the  unemployed. 
One  of  the  most  serious  problems  of  the  modern  industrial 
system  is  how  to  mitigate  the  evUs  of  this  transition  period. 


§  130]  Supply  of  Labor  303 

In  the  long  run,  however,  under  modern  conditions  of  the 
free  play  of  economic  forces  the  supply  of  labor  will  adjust 
itself  to  the  demand  through  changes  in  the  growth  of  popu- 
lation. The  fundamental  point  here,  however,  is  the  rate  of 
remuneration  or  scale  of  wages,  —  a  discussion  of  which  must 
be  left  to  the  next  book. 


CHAPTER  XX 
LAND 

131.    References 

J.  B.  Clark,  Distribulion  (1899),  ch.  xiii,  and  Essentials  of  Economic 
Theory  (1907),  ch.  xi;  Finch  and  Baker,  Geography  of  the  World's  Agri- 
culture (1917);  A.  Marshall,  Principles  (1910),  bk.  iv,  chs.  ii,  iii;  H.  R. 
Sea-ger,  Principles  (1913),  ch.  viii;  A.  S.  Johnson,  Rent  in  Modern  Economic 
Theory  (1902),  ch.  ii;  R.  M.  Hurd,  Principles  of  City  Land  Values  (1903) ; 
M.  B.  Hammond,  The  Cotton  Industry,  part  i.  The  Cotton  Culture  (1897); 
E.  J.  Payne,  History  of  America,  I  (1892),  342,  366-384;  U.  S.  Industrial 
Commission,  Report  (1902),  X,  and  XIX,  46-123;  T.  N.  Carver,  Prin- 
ciples of  Rural  Economics  (1911);  C.  R.  van  Hise,  The  Conservation  of 
Natural  Resources  in  the  U.  S.  (1910);  V.  G.  Simkhovitch,  "Hay  and 
History"  in  Political  Science  Quarterly,  vol.  xxviii  (1913). 

132.   Land  as  a  Separate  Factor  of  Production 

Land  is  generally  distinguished  from  capital  as  a  separate 
factor  of  production.  The  distinction,  however,  is  sometimes 
made  on  insufficient  grounds. 

(i)  It  is  claimed,  for  instance,  that  land  is  a  gift  of  nature, 
while  capital  is  a  product  of  labor.  It  must  be  remembered, 
however,  that  economics  has  to  deal  with  value,  and  that  from 
the  point  of  view  of  value  it  is  difficidt  to  draw  so  sharp  a  line. 
Into  many  tracts  of  land  there  has  been  put  as  much  labor  as 
into  equally  valuable  concrete  products.  Without  the  dykes 
of  Holland  and  the  irrigation  works  of  arid  America  the  land 
would  be  worthless.  In  some  garden  plots  on  the  European 
continent  the  tenant  on  leaving  is  permitted  to  take  with  him 
several  inches  of  soil,  —  the  value  of  the  land  is  as  much  or 
as  little  a  product  of  labor  as  in  the  case  of  other  things.  It 
may  be  coriu^iided,  however,  that  the  value  of  urban  land  at 
least  is  not  a  product  of  labor.  But  how  about  the  value  of  a 
newspaper,  or  a  banking  business?     As  the  country  town  be- 

304 


§  132]  Land  and  Production  305 

comes  a  prosperous  city,  the  newspaper,  like  the  corner  plot, 
becomes  more  valuable,  even  though  the  editor  works  no  harder 
than  before.  The  circulation  increases  through  the  operation 
of  the  same  social  forces  which  raise  the  value  of  the  land. 
There  may  indeed  be  more  newspapers,  but  there  will  also  be 
more  corner  plots.  Even  if  we  attempt  to  reduce  values  to  the 
quantities  of  labor,  it  is  hazardous  to  distinguish  between  land 
and  capital  on  this  ground:  in  a  diamond  drill,  which  is  as- 
suredly a  piece  of  capital,  the  overwhelming  share  of  the  value 
may  be  ascribable  to  the  raw  material  or  gift  of  nature,  and 
only  a  small  part  to  labor;  in  a  truck-farm,  three-quarters  of 
the  value  of  the  land  may  be  found  in  labor  and  only  a  quar- 
ter in  the  gift  of  nature.  In  other  words,  in  the  value  of  some 
land,  labor  plays  a  large  role;  and  in  the  value  of  some  capital, 
nature  plays  a  large  role.  This  distinction  is  hence  inadequate. 
(2)  Again,  it  is  contended  that  land  is  indestructible,  while 
capital  is  perishable.  Here,  again,  the  rejoinder  may  be  made 
that  the  qualities  which  give  value  to  the  land  are  not  inde- 
structible. It  is  a  commonplace  that  the  chemical  ingredients 
of  the  soil  need  to  be  constantly  renewed.  The  best  agricul- 
tural land  may  become  the  worst,  and  the  worst  the  best,  after 
a  few  generations  of  exploitation  or  thrift,  as  the  case  may  be. 
But  surely,  it  will  be  said,  the  qualities  of  extension  or  location 
are  indestructible.  Even  here,  however,  it  must  be  observed 
that  the  two  things  are  not  identical.  The  mere  extension  of 
land  is  indeed  indestructible,  but  it  gives  no  value.  All  land  is 
alike  in  extension,  —  the  worthless  and  the  valuable.  Location 
is  extension  plus  situation,  just  as  fertility  is  extension  plus 
chemical  ingredients.  Location  gives  value  to  land,  but  loca- 
tion is  not  indestructible  as  an  economic  factor.  The  land 
may  remain,  but  the  value  may  change  because  of  an  alteration 
in  its  contiguity  to  a  market.  The  land  is  still  there,  but  the 
market  may  disappear,  and  thus  to  all  intents  the  economic 
location  of  the  land  suffers  a  change.  Any  falling  off  in  demand, 
such  as  a  decrease  or  shifting  of  population,  a  change  in  com- 
20 


306  Land  [§  132 

merce,  an  alteration  in  the  conditions  of  transportation,  may 
reduce  or  wipe  out  land  values.  In  the  deserted  mining  towns 
of  the  West  the  value  of  the  land  has  vanished,  perhaps  never 
to  return.  Value  is  a  product  of  human  relations:  nothing 
human  is  indestructible. 

(3)  It  is  often  said  that  land  is  fixed  in  quantity  and  not 
reproducible.  To  this  the  double  answer  may  be  made:  some 
other  things  are  non-reproducible  as  well,  and  in  the  true  eco- 
nomic sense  land  itself  is  really  not  fixed  in  quantity.  Reprodu- 
cibility is  a  relative  term:  some  things  can  be  easily  reproduced ; 
some  with  difficulty;  some,  like  old  coins  or  works  of  art,  not  at 
all.  Furthermore  the  supply  of  land  can  be  increased  both 
actually  and  relatively.  There  have  always  been,  and  still 
are,  vast  stretches  of  unused  and  worthless  land  in  every  coun- 
try and  of  comparatively  worthless  land  near  every  city;  when- 
ever it  becomes  profitable,  new  areas  are  put  under  cultivation 
or  covered  with  residences.  The  striking  fact  of  the  past  cen- 
tury has  been  the  increase  in  the  supply  of  arable  land  and  the 
growth  of  urban  areas.  Even,  however,  if  all  the  land  in  a 
given  country  or  city  is  occupied,  its  economic  utilization  can 
be  increased,  and  that  is  equivalent  to  a  relative  growth  of 
supply.  More  intensive  farming  in  the  country  or  better  or 
higher  structures  in  the  city  have  the  s^me  effects  as  an  in- 
crease in  supply.  The  limit  here,  as  in  all  economic  goods,  is 
the  margin  of  utilization. 

While  the  differences  between  land  and  other  things  that 
constitute  capital  are  thus  differences  in  degree  rather  than  in 
kind,  it  remains  none  the  less  true  that  land  may  usefully  be 
put  into  a  separate  category.  This  is  due  to  the  fact  that  an 
increased  supply  of  other  things  in  general  involves  a  dupli- 
cation of  the  thing  itself,  while  the  increased  supply  of  land 
involves  a  difTerence  in  location  or  fertility.  To  call  this  the 
law  of  diminishing  returns  is  in  one  sense  inexact,  since  the 
law  of  diminishing  returns  is  applicable  to  everything  that 
possesses  value.     The  law  of  diminishing  returns,  however,  has 


§  132]  Land  and  Production  307 

peculiar  consequences  when  applied  to  land.  If  an  employer 
needs  more  laborers,  he  can  ordinarily  secure  an  increased 
supply  at  the  same  wages,  even  though  there  is  a  certain  point 
beyond  which  it  does  not  pay  him  to  employ  more.  If  a  manu- 
facturer needs  additional  machines,  he  can  ordinarily  buy  them 
at  the  same  price,  even  though  he  will  buy  only  up  to  a  cer- 
tain limit.  In  fact  the  progress  of  society  means  more  ma- 
chines or  more  capital  and  lower  cost.  But  if  more  land  is 
needed,  recourse  must  be  had  to  less  fertile  or  less  well-situ- 
ated land,  which  normally  means  a  higher  cost.  The  more 
intensive  farming  or  the  higher  structures  referred  to  in  the 
last  paragraph  amount  indeed  to  an  increase  in  the  supply  of 
land,  but  they  also  involve  an  increase  of  cost. 

Economic  progress,  then,  may  have  different  effects  on  land 
as  compared,  not  indeed  with  all  other  things,  but  with  the 
great  mass  of  other  production  goods.  The  advance  of  inven- 
tion and  civilization  is  apt  gradually  to  reduce  the  prices  of 
manufactured  articles,  but  the  increase  of  output  and  of  civi- 
lization may  lead  to  a  greater  demand  for  given  tracts  of  land, 
and  therefore  to  an  increase  in  their  price.  A  moderate  tax 
on  ordinary  commodities,  reproducible  at  pleasure,  tends  to  de- 
crease their  number  and  thus  to  increase  their  price;  a  similar 
tax  on  the  value  of  land  is  apt  to  exert  no  influence  on  its  exist- 
ence, and  therefore  none  in  increasing  its  price. 

While  land  thus  is  a  part  of  capital  from  the  point  of  view 
of  the  laws  which  explain  the  nature  of  rental  value  in  general, 
and  the  relation  of  rental  to  capital  value,  land  is  usefully 
contrasted  with  capital  if  we  compare  changes  in  land  rents 
and  values  with  changes  in  the  great  mass  of  other  things,  the 
increased  production  and  accumulation  of  which  constitute 
progress.  Because  of  the  social  significance  of  such  relative 
changes,  it  is  legitimate  to  put  land  into  a  separate  category. 


3o8  Land  [§  133 

133.   Fertility  of  Land 

Land  has  value  as  a  factor  in  production  either  because  it 
yields  some  concrete  produce  or  because  it  affords  a  service  as 
the  physical  support  of  man.  The  productivity  of  land,  that 
is,  the  value  of  its  contribution  to  wealth,  depends  in  either 
case  on  two  facts,  —  its  fertility  and  its  situation.  The  fertility 
is  a  result  of  the  constituents  of  the  soil  combined  with  its 
extension;  situation  is  not  simply  extension,  but  geographical 
location.  According  to  the  uses  to  which  land  is  put,  we  divide 
it  into  the  categories  of  pasture,  agricultural,  forests,  mineral 
and  urban  land.  Each  of  these  is  again  divisible:  pasture 
land,  for  instance,  into  sheep,  goat,  hog  and  cattle  pasture; 
agricultural  land  into  meadow  and  plough  Cor  arable)  land 
with  as  many  sub-classes  as  there  are  varieties  of  crops;  forest 
and  mineral  lands  according  to  the  character  of  the  timber 
or  mineral  (including  under  this  designation  such  nonmetallic 
products  as  coal  and  oil) ;  urban  land  into  business,  residential, 
apartment  or  tenement  land. 

So  far  as  the  element  of  fertility  is  concerned,  land,  like  all 
other  forms  of  wealth,  is  subject  to  the  law  of  diminishing 
returns.  In  agricultural  land  there  is  at  every  moment  a  max- 
imum return  from  the  application  of  a  given  amount  of  labor 
or  capital.  As  we  have  seen  above  (§  88),  the  margin  beyond 
which  the  returns  begin  to  diminish  may  be  an  intensive  or  an 
extensive  margin.  When  this  margin  has  been  passed,  we 
must,  in  order  to  secure  the  same  yield,  either  renew  the  fer- 
tility of  the  old  plot  or  select  a  fresh  plot.  But  the  marginal 
point  is  always  definitely  ascertainable.  In  a  small  and  lonely 
New  England  farm  the  best  results  may  come  from  employing 
a  laborer  for  every  few  acres  and  not  utilizing  expensive  imple- 
ments; in  the  far  West  it  may  be  more  profitable  to  use  the 
costliest  machines  and  to  economize  in  human  labor;  in  a 
truck  farm  the  application  of  rich  manures  may  yield  the  great- 
est profits.     In  all  cases  there  is  a  point  beyond  which  any 


§  133]  Fertility  309 

additional  "dose"  of  capital  or  labor  will  give  proportionally- 
smaller  returns.  Under  normal  conditions  of  progress  the 
self-interest  of  the  individual  farmer  may  be  relied  upon  to 
ascertain  this  point.  Under  a  system  of  free  competition  each 
farmer  will  seek  to  secure  the  largest  produce  from  his  land, 
and  the  greater  the  output,  the  lower  will  be  the  price.  The 
private  interest  of  the  producer  will  thus  tend  to  coincide  with 
the  general  interest  of  the  community.  This  is  at  once  the 
basis  and  the  justification  of  private  property  in  agricultural 
land. 

In  the  case  of  timber  land  this  coincidence  between  private 
and  public  interests  is  by  no  means  so  unquahfied.  In  grazing 
4and  the  pasture  replenishes  itself  from  season  to  season;  in 
agricultural  land  the  crop  follows  within  a  few  months,  or,  as 
in  the  case  of  fruit  lands,  wuthin  a  few  years  of  the  application 
of  labor  or  capital.  But  in  forest  land  the  reproduction  of  the 
giove  takes  decades  or  even  centuries.  A  wise  forest  policy 
which  endeavors  to  insure  a  continuous  supply  to  the  public 
will  therefore  content  itself  wath  felling  only  the  ripe  timber. 
Private  interest,  on  the  other  hand,  which  looks  to  immediate 
gains  may  derive  more  profit  from  the  complete  clearing  of  the 
forest.  When  the  woods  are  practically  inexhaustible,  as  in  the 
early  period  of  American  civilization,  it  makes  but  little  differ- 
ence. But  when  the  forests  are  destroyed  to  such  an  extent  as 
not  only  to  cut  off  the  supply  of  useful  woods  but  seriously  to 
endanger  the  equable  flow  of  the  streams  and  to  threaten,  as 
in  Spain,  an  alternation  of  complete  drought  with  devastating 
inundations,  the  situation  becomes  serious.  Timber  land  here 
can  best  accomplish  the  social  ends  of  production  through  a 
policy  which  combines  the  cutting  of  the  mature  trees  w'ith 
the  preservation  of  the  forest  itself.  It  is  partly  for  this 
reason  that  governments  are  everywhere  retaining  or  adding 
to  their  forest  lands,  as  in  the  United  States  with  its  num- 
erous national  forest  reserves  and  occasional  state  parks; 
while  some  countries  even   seek   to   control  the  action  of  pri- 


3IO  Land  [§  133 

vate  forest  owners,  in  the  effort  to  prevent  denudation  or  to 
secure   reforestation. 

In  mineral  lands  the  possibility  of  reproduction  is  excluded 
by  the  very  nature  of  the  case.  The  law  of  diminishing  returns, 
however,  is  equally  operative,  even  though  its  working  is  apt  to 
be  obscured.  In  some  mines  it  becomes  necessary  to  go  deeper 
for  an  increased  supply,  with  a  resulting  rise  of  cost  which 
finally  becomes  prohibitive  and  leads  to  a  complete  cessation 
of  operations.  Even  where,  as  in  the  oil  or  diamond  fields  or 
in  some  coal  or  iron  mines,  the  returns  seem  to  be  constant 
from  year  to  year,  we  are  in  the  presence  of  diminishing  re- 
turns, for  the  source  of  the  returns  is  itself  being  slowly  con- 
sumed. At  the  end  of  a  given  period,  be  it  short  or  long,  no^ 
only  will  the  returns  abruptly  stop,  but  the  possibility  of  secur- 
ing any  further  yield  in  the  future  will  also  have  disappeared. 
As  was  explained  above,  we  must  therefore  abstract  from  each 
recurring  return  a  sum  which  when  capitalized  at  the  rate  of 
production  will  ultimately  amount  to  the  total  original  capital 
and  replace  the  value  of  the  initial  stock.  Translated  into 
ordinary  business  language,  we  must  allow  for  depreciation, 
—  a  depreciation  which,  when  continued  long  enough,  will 
entirely  absorb  the  original  capital.  The  life  of  the  anthra- 
cite coal  fields  in  Pennsylvania,  for  instance,  is  estimated,  on 
the  basis  of  the  present  rate  of  production,  at  between  one  and 
two  hundred  years;  and  of  the  English  coal  fields  at  some- 
what less.  In  the  case  of  agricultural  land,  then,  additional 
doses  of  capital  or  labor  will  yield  a  relatively  smaller  produce; 
in  the  case  of  mines  or  badly  managed  forests  the  ostensible 
produce  may  be  the  same,  but  the  real  net  return  on  the  original 
unimpaired  investment  becomes  constantly  smaller. 

Even  in  the  case  of  urban  land  the  same  law  applies.  The 
fertility,  that  is,  the  productive  service,  of  certain  lands  con- 
sists in  yielding  support  to  buildings.  It  may  indeed  be  profit- 
able to  replace  a  tent  by  a  wooden  shanty,  a  shanty  by  a  stone 
house,  and  perhaps  even  a  stone  house  by  a  steel  skyscraper. 


§  134]  Location  3  1 1 

Obviously,  however,  at  a  given  moment  there  will  be  a  point 
beyond  which  a  more  expensive  structure  will  not  yield  propor- 
tionate returns. 

134.   Situation  or  Geographical  Location  of  Land 

The  value  of  all  production  goods  is  derived,  as  we  know,  from 
that  of  the  products  or  consumption  goods.  Oranges  do  not 
sell  at  higher  prices  than  potatoes  because  the  owner  must  pay 
more  for  orange  lands  than  for  potato  lands;  on  the  contrary, 
orange  lands  cost  more  than  potato  lands  because  the  oranges 
that  can  be  grown  on  an  acre  sell  for  a  larger  sum  than  the  pota- 
toes that  can  be  raised  on  the  same  area.  Whether  the  land 
can  be  used  for  oranges  rather  than  potatoes  often  depends  as 
much  on  location  as  on  fertility.  The  most  fertile  land  may 
be  so  far  removed  from  the  market  that,  notwithstanding  the 
great  potential  supply  of  the  produce,  the  land  will  be  value- 
less because  there  is  no  effective  demand  for  its  product.  The 
mutations  in  value  due  to  changes  in  situation  are  in  modern 
times  far  greater  than  those  due  to  changes  in  fertility.  The 
fruitfulness  of  land  is  subject  to  the  alternations  of  weather  or 
chances  of  nature,  but  it  may  on  the  whole  be  kept  fairly  unim- 
paired with  reasonable  care,  and  may  be  increased  up  to  a 
certain  point  by  unremitting  attention.  The  economic  changes 
in  situation,  on  the  other  hand,  are  often  sudden,  long-continued 
and  unpredictable.  The  orange  lands  in  Southern  Italy  have 
recently  been  ruined  by  the  rapid  introduction  of  California 
fruit  into  the  Eastern  market;  the  wheat  lands  of  England 
have  suffered  greatly  during  the  last  half-century  by  the  open- 
ing up  of  vast  stretches  in  the  New  World.  Per  contra,  when 
the  Erie  Canal  was  completed  the  sections  near  the  terminals 
appreciated  enormously,  and  we  have  daily  examples  of  the 
sudden  rise  of  value  in  districts  newly  served  by  a  railroad. 

These  considerations  apply  to  urban  land  as  well.  In  the 
main,  and  especially  when  long  periods  are  taken,  the  value  of 
urban  lands  grows  with   the  development  of  the  city.     Mere 


3 1 2  Land  [§  134 

agglomeralion  of  population  does  not  involve  an  increase  of 
land  values,  if,  as  in  Naples  to-day,  the  growth  of  population 
is  accompanied  by  a  lessening  of  business  prosperity  and  there- 
fore by  a  diminution  in  the  income  of  the  consumer  and  tenant. 
But  where  numbers  increase  with  prosperity,  land  values  nat- 
urally rise.  The  mutations  of  situation,  howev'er,  do  not  al- 
ways result  in  an  advance.  Certain  sections  in  Greater  New 
York  are  to-day  worth  less  than  a  few  decades  ago,  because 
the  tide  of  business  or  fashion  has  ebbed  rather  than  flowed. 
The  introduction  of  new  trolleys  or  subways  has  advanced 
some  sites  but  depreciated  others. 

It  is  largely  due  to  the  element  of  situation  that  different 
classes  of  land  are  within  certain  limits  capable  of  being  trans- 
formed into  each  other.  A  diamond  field  can  of  course  not 
yield  a  good  rice  crop,  nor  can  rubber  forest  land  ever  be  profit- 
ably utilized  for  oats.  But  pasture  land  may  become  wheat 
land,  wheat  may  be  supplanted  by  garden  produce,  and  truck 
farms  in  turn  may  change  into  cheap  suburban  sections  and 
finally  into  expensive  business  sites.  From  this  point  of  view 
land  possesses  great  mobility.  In  a  certain  physical  sense  land 
is  fixed,  while  everything  else  is  movable,  • —  and  this  is  the 
basis  of  the  legal  distinction  between  movables  and  immova- 
bles. But  in  the  economic  sense  land  is  mobile,  and  capital 
as  opposed  to  land  is  immobile.  A  machine  can  best  be  used 
for  a  particular  purpose,  and  is  only  rarely  serviceable  for 
anything  else;  a  piece  of  land  can  often  serve  any  one  of  a 
large  number  of  different  uses.  Any  economic  fact  which  brings 
about  a  relative  change  in  situation  confers  mobility  upon 
land. 

Since  situation  is  such  an  important  element  in  productivity, 
all  changes  which  tend  to  diminish  distance  by  bringing  the 
producer  and  consumer  together  are  a  mark  of  progress.  The 
previously  existing  sources  of  supply  may  fall  in  value,  as  in 
the  case  of  the  New  England  farms  or  the  Italian  orange  groves, 
but  the  existing  stock  of  wealth  as  a  whole  is  increased  by  the 


§  135]  Cultivation  313 

reduction  of  cost.  It  is,  however,  important  to  remember  that 
so  far  as  the  productivity  of  land  is  ascribable  to  situation,  its 
rise  in  value  is  more  and  more  due  to  its  increasing  contribu- 
tion to  the  production  of  other  things  than  the  mere  agricul- 
tural produce.  An  industrial  enterprise  is  located  in  a  city 
for  the  same  reason  as  a  workman  or  a  lawyer:  the  greater 
expense  of  the  land  for  the  factory  or  the  home  is  more  than 
ofTset  by  the  lower  costs  in  other  respects  or  by  the  expectation 
of  higher  returns.  With  the  growth  of  industry  and  population 
the  productivity  of  land  depends  more  and  more  on  situation 
and  relatively  less  on  mere  fertility. 

135.    Cultivation  of  Land 

So  far  as  situation  is  concerned,  the  increase  of  productivity 
is  solely  a  result  of  the  progressive  elimination  of  the  costs  of 
transportation.  So  far  as  fertility  is  concerned,  a  far  larger 
field  of  activity  is  open  to  human  ingenuity.  The  application 
of  labor  to  land  is  its  cultivation.  Agricultural  products  are 
commonly  divided  into  fruits,  roots,  cereals  and  leguminous 
plants.  Food-roots  and  cereal  grasses  are  found  in  a  state  of 
nature,  and  their  cultivation  and  improvement  play  somewhat 
the  same  role  in  progress  as  does  the  domestication  of  w^ild 
animals.  There  have  been  several  important  stages  in  agri- 
cultural development. 

(i)  The  first  is  the  system  of  migratory  agriculture  or  the 
shifting  of  the  arable  area.  This  is  found  at  the  outset  in  all 
countries  where  land  is  abundant  and  where  the  community 
is  on  the  point  of  abandoning  the  hunting  or  the  pastoral  life. 
A  particular  plot  is  tilled  for  a  season  or  two  in  the  roughest 
manner,  and  when  the  soil  begins  to  show  evidences  of  de- 
terioration the  cultivators  abandon  the  land  and  pass  on  to  a 
fresh  tract,  perhaps  to  return  to  the  first  after  a  long  time  has 
intervened  and  restored  its  primitive  fertility.  Where  the 
land  is  covered  with  forests,  a  clearing  is  made  by  fire,  the 
ashes  fertilizing  the  ground  and  the  stumps  being  allowed  to 


314  Land  [§135 

remain  and  rot.  Because  of  this  burning  process,  the  system 
is  also  called  essartage.  Where  the  land  is  near  the  seashore 
seaweed,  as  in  the  American  colonies,  is  frequently  employed 
as  fertilizer. 

Migratory  agriculture  was  applied  to  both  roots  and  cereals. 
Root  culture  generally  precedes  that  of  cereals,  and  no  real 
civilization  was  ever  based  on  root  culture  alone.  In  America, 
for  instance,  before  the  advent  of  the  white  man,  the  potato 
and  the  manioc  gave  way  to  maize,  and  where,  as  in  Hayti, 
this  was  not  the  case,  there  was  but  slight  progress.  As  Payne 
has  pointed  out,  cereal  agriculture  alone,  among  the  forms  of 
food-production,  taxes,  recompenses  and  stimulates  labor  and 
ingenuity  in  an  equal  degree. 

(2)  The  second  stage  is  that  of  surface  tillage  or  stationary 
agriculture.  As  the  forests  disappear  or  the  supply  of  free 
land  diminishes,  the  essartage  or  migratory  system  gives  way 
to  the  more  permanent  occupation  of  a  given  area,  and  its 
periodical  reduction  to  a  state  of  tilth.  Much  of  course  depends 
on  conditions  of  climate.  In  the  Old  World  were  found  wild 
culminiferous  grasses  which  made  possible  the  cultivation  of 
wheat,  barley,  oats,  rye,  millet  and  rice.  In  the  New  World, 
although  other  indigenous  grains  existed,  the  wild  corn  or 
maize  soon  became  practically  the  only  cultivated  cereal.  This, 
together  with  the  fact  that  no  important  beasts  of  burden  like 
the  ox  or  the  horse  are  found  in  historic  times,  goes  far,  as  was 
remarked  above,  to  explain  the  lower  level  of  civilization  reached 
by  the  Indians  in  Mexico  or  Peru,  compared  with  the  natives 
of  Asia  and  Europe.  Where  the  soil  is  composed  of  alluvial 
deposits  or  possesses  great  fertility  for  other  reasons,  the  natural 
surface  affords  so  abundant  a  yield  that  only  very  slight  manur- 
ing is  needed  to  furnish  a  practically  continuous  crop.  Sur- 
face tillage  may  therefore  also  be  called  the  one-crop  system. 
When  the  land  retains  its  fertility  with  little  labor,  and  where 
there  is  a  constant  demand  for  the  particular  product,  this  one- 
crop  system  may  persist  for  a  long  time. 


§  135]  Cultivation  315 

(3)  Usually,  however,  some  form  of  rest  is  found  to  im- 
prove the  fertility  of  the  land.  We  thus  reach  the  third  stage 
of  what  is  best  called  alternating  agriculture.  That  is,  there 
is  an  alternation  of  crop  and  fallow,  the  same  piece  of  land 
being  cultivated  one  year,  serving  as  a  rough  pasture  the  follow- 
ing year.  At  any  given  time,  therefore,  there  are  two  fields, 
—  one  for  the  crop,  one  lying  fallovw.  This  is  hence  also  called 
the  two-field  system.  It  was  soon  ascertained,  however,  that 
still  better  results  could  be  attained  by  extending  the  alterna- 
tion to  the  crops  as  well,  and  we  thus  reach  the  three-field  system, 
the  same  field  being  devoted  the  first  year  to  wheat,  the  second 
to  oats,  and  lying  fallow  the  third  year.  This  system,  which 
is  found  throughout  mediaeval  Europe  is  also  called  the  open- 
field  or  intermixed  system,  because  the  land  was  cultivated  in 
narrow  strips,  each  cultivator  possessing  one  or  more  strips  in 
different  parts  of  the  field,  separated  from  the  other  strips  not 
by  any  fence  or  hedge  but  only  by  small  ridges  or  balks. 

(4)  The  fourth  stage  is  reached  when  a  substitute  is  found 
for  the  recurrent  fallow  or  waste.  This  consists  in  so  increasing 
the  number  and  variety  of  the  crops,  and  in  such  a  skilful  use 
of  animal  and  mineral  manures,  that  the  fertility  of  the  soil 
is  kept  practically  constant  without  any  fallow  at  all.  This 
system  is  known  as  that  of  convertible  husbandry,  or  in  its  still 
more  developed  stages  as  that  of  the  rotation  of  crops  or  diversi- 
fied farming.  It  involves  the  use  in  turn  of  cereal  and  root 
crops,  and  especially  the  application  of  hay  and  of  grasses  like 
clover.  In  England,  where  the  transition  took  place  in  the 
eighteenth  century,  it  was  also  called  the  system  of  enclosures, 

.because  the  method  of  separate  strips  was  abolished,  and 
the  whole  field  was  now  cultivated  in  the  same  way,  separated 
from  the  adjoining  fields  by  a  hedge  or  fence. 

The  earlier  systems  of  agriculture  involve  the  use  of  much 
land  and  of  comparatively  little  i.ibor.  They  are  hence  called 
extensive  systems.  The  greater  the  effort  made  to  secure 
larger  crops  by  economizing  land  rather  than  labor,  the  nearer 


3  1 6  Land  [§  135 

we  approach  the  system  of  intensive  farming.  When  it  is  found 
profitable  to  economize  in  labor  rather  than  in  land  through 
the  use  of  capital  in  the  shape  of  farm  machinery,  we  reach 
the  most  modern  form  of  large-scale  agriculture,  which  is 
usually  termed  capitalistic  farming,  and  which  will  be  dis- 
cussed later.  At  any  given  period,  however,  extensive  farming 
may  be  more  economical  than  intensive  farming. 

In  the  United  States  we  find  most  of  these  phases.  The 
period  of  essartage  or  forest  clearing  was  soon  followed  by  the 
surface  tillage  or  one-crop  system,  which  still  prevails  over 
a  large  part  of  the  South.  The  open-field  system,  however, 
flourished  only  in  very  small  sections  of  the  East,  because  the 
rapid  increase  in  wealth  in  the  North  and  West  rendered  prof- 
itable the  transition  on  the  one  hand  to  large-scale  farming 
and  on  the  other  to  the  more  intensive  system  of  crop  rota- 
tion. W^ith  the  advance  of  prosperity  the  most  effective  use  of 
the  land  leads  to  continual  changes.  In  large  sections  of  the 
East,  for  instance,  the  cultivation  of  cereals,  with  the  possible 
exception  of  corn,  has  become  unprofitable.  The  less  fertile 
lands  have  been  converted  into  permanent  pasture,  and  the 
increase  in  the  average  fertility  of  plough  and  meadow  lands 
coupled  with  the  growth  of  forage  crops  and  the  use  of  the 
silo  tends  to  diminish  the  relative  amount  of  cultivated  land. 
The  process  of  transition  culminates  in  the  dairies  and  market- 
gardening  farms  of  the  thickly  populated  communities.  Given 
liberty  and  intelligence,  the  farmer  may  be  relied  on  to  choose 
that  form  of  tillage  which  is  most  profitable  to  him  and  most 
productive  to  the  community. 


CHAPTER  XXI 
CAPITAL 

136.  References 

J.  B.  Clark,  Distribidion  (1899),  chs.  ix-xii,  and  Essentials  of  Economic 
Theory  (1907),  chs.  xviii,  xx;  F.  A.  Fetter,  Principles  (1915),  ch.  xxii;  E. 
V.  Bohm-Bawerk,  Positive  Theory  of  Capital  (1891),  bk.  ii,  ch.  ii;  W.  S. 
Jevons,  Theory  (1888),  ch.  vii;  T.  N.  Carver,  Distribution  (1904),  ch.  vi; 
R.  Mayo-Smith,  Statistics  and  Economics  (1895),  ch.  v;  F.  A.  Walker, 
Political  Economy  (1888),  part  2,  ch.  iii;  T.  Veblen,  Theory  of  Business 
Enterprise  (1904),  chs.  ii,  ix;  A.  Marshall,  Principles  (1910),  bk.  iv,  ch. 
vii;  A.  T.  Hadley,  Economics  (1896),  ch.  v;  J.  S.  Nicholson,  Principles 
(1893),  bk.  i,  ch.  vi,  and  Machinery  and  Wages  (1892),  chs.  iv,  v;  F.  W. 
Taussig,  Principles  (1911),  ch.  v;  H.  R.  Seager,  Principles  (1913),  ch. 

■■'  ix;  R.  GilTen,  Economic  Inquiries  (1904),  part  2;  W.  P.  Trowbridge, 
Report  on  Poiver  and  Machinery  Employed  in  Manufactures  {U.  S.  Tenth 
Census,  Extra  Volume,  1888),  U.  S.  Twelfth  Census,  VII;  United  States 

,  Industrial  Commission,  Report,  XIX  (1902),  514-544. 

I  137.   Kinds  of  Capital 

!       We   have   seen   that   capital   in   its   broadest   sense   includes 
'  everything  that  has  a  capital  value.     The  totality  of  capital 
i  is  equivalent  to  the  totality  of  wealth.     Capital  would  then 
I  comprise  three  great  categories:     (i)   consumption  capital,  or 
f  wealth  which  affords  a  benefit  income,  like  food,  jewels,  books 
in  the  hand  of  the  consumer;    (2)  lucrative  or  acquisitive  capi- 
tal,  that  is,   any  form  of  wealth   including  relations  like   the 
franchise  of  a  corporation  or  the  good-will  of  a  business  which 
gives   a   money   income;     (3)    production   capital,   or   concrete 
goods  which  are  utilized  to  produce  more  goods.     In  treating 
of  capital  as  an  agent  of  production  it  is  with  this  third  aspect 
that  we  have  to  deal.     From  the  point  of  view  of  progress, 
moreover,  this  is  the  important  aspect,  since  the  first  condition 

317 


3  1 8  Capital  [§  137 

of  progress  is  the  increase  of  the  concrete  goods  that  consti- 
tute wealth. 

Capital  in  this  sense  can  be  further  classified  into  land  and 
other  capital.  If  capital  be  regarded  as  either  consumption 
or  lucrative  capital,  there  is  no  need  for  such  a  distinction. 
Whether  a  man  enjoys  an  estate  or  a  painting  is  immaterial,  — 
neither  can  perhaps  be  duplicated  as  consumption  capital. 
Whether  he  applies  a  fund  of  a  given  amount  to  the  purchase 
of  a  farm  or  a  share  of  stock  is  again  immaterial,  so  far  as  each 
represents  so  much  lucrative  capital.  But  as  an  agent  of  pro- 
duction, land,  as  we  have  seen,  stands  in  a  relation  socially  so 
peculiar  to  the  producer,  and  is  moreover  of  such  paramount 
importance  when  compared  to  any  other  single  category  of 
concrete  goods,  that  it  is  best  discussed  by  itself. 

Capital  as  an  agent  of  production  is  sometimes  classified  as 
fixed  and  circulating  capital.  The  original  distinction  of  Adam 
Smith  was  that  circulating  capital  comprised  goods  from,  which 
profits  could  be  derived  only  by  their  circulating  from  hand  to 
hand,  like  finished  products,  while  fixed  capital  was  that  which, 
like  a  house,  yielded  a  revenue  without  changing  hands  or 
circulating  any  further.  As  a  matter  of  fact,  however,  the  only 
kind  of  capital  which  circulates  indefinitely  is  money;  in  other 
cases,  as  when  a  product  goes  direct  to  the  consumer,  there 
may  be  only  one  change  of  hands.  The  great  aim  of  modern 
enterprise,  in  fact,  is  to  reduce  the  circulation  to  the  narrow- 
est limits. 

Another  way  of  explaining  the  distinction  is  to  say  that  fixed 
capital  comprises  such  things  as  can  be  used  repeatedly  for 
productive  purposes  without  suffering  much  change;  and  that 
circulating  capital  consists  of  things  the  single  use  of  which 
would  convert  them  from  the  category  of  production  goods 
into  that  of  consumption  goods.  A  machine  would  be  fixed 
capital;  the  leather  just  before  being  converted  into  the  shoe 
would  be  circulating  capital.  This  is  virtually  the  distinction 
between  durable  and  perishable  wealth.     It  is  also  sometimes 


§  137]  Kinds  of  Capital  319 

expressed  as  a  distinction  between  active  and  passive  forms 
of  capital,  the  active  capital  being  the  fixed  capital  which,  like 
the  machine,  makes  the  impression,  the  passive  capital  being 
the  circulating  capital,  which,  like  the  leather,  receives  the 
impression.  This  nomenclature  is  less  happy  in  that  it  ob- 
scures the  fact  that  all  forms  of  productive  capital  co-operate 
with  each  other,  and  in  this  sense  are  really  active. 

Another  classification  of  capital  is  that  according  to  the 
uses  to  which  it  can  be  put,  as  agricidtural,  commercial,  in- 
dustrial and  financial  capital. 

(i)  By  agricultural  capital,  strictly  speaking,  is  meant  some- 
thing different  from  land  or  landed  capital.  Agricultural  cap- 
ital is  not  land,  but  the  things  applied  to  the  land;  land  or 
landed  capital  is  the  ground  itself.  When  we  speak  of  a  man 
putting  his  capital  into  land,  we  mean  that  he  invests  in  a 
piece  of  land;  when  we  say  that  he  applies  capital  to  land, 
we  mean  that  he  spends  his  money  on  better  farming  tools 
or  machines,  manures,  drains  or  beasts  of  burden.  In  the 
former  case  we  would  have  land  or  landed  capital;  in  the  latter 
we  have  agricultural  capital.  This  distinction,  however,  is  fre- 
quently not  observed. 

(2)  When  the  concrete  pieces  of  capital  take  the  form  of 
ships,  docks,  warehouses  or  media  of  internal  commerce,  we 
speak  of  commercial  capital.  When  capital  is  applied  to  the 
processes  of  industry  in  the  narrower  sense,  we  speak  of  in- 
dustrial capital.  From  one  point  of  view  the  same  object  may 
be  regarded  in  turn  as  industrial,  commercial  or  agricultural 
capital.  A  cart  may  be  constructed  in  a  factory  and  then  used 
in  the  industrial  operations  of  another  factory;  it  may  be  em- 
ployed by  a  merchant,  and  may  finally  be  sold  to  a  farmer  for 
use  on  the  farm,  serving  in  turn  as  industrial,  commercial  and 
agricultural  capital.  The  characteristic  feature  of  modern  fife 
is  the  increasing  importance  of  industrial  capital. 

(3)  By  financial  capital  is  meant  not  so  much  the  concrete 
objects  as  the  fund  or  money  embodiment  of    the  agent  used 


320  Capital  •  [§  138 

in  financing  or  rendering  possible  economic  enterprises.  The 
surplus  from  any  economic  activity  may  be  stored  up  in  the 
shape  of  jewelry  or  of  coins;  and  this  surplus  wealth  is  the 
financial  capital  which  may  at  any  moment  be  devoted  to  pro- 
ductive enterprise.  In  modern  times  the  surplus  is  put  not 
only  into  money,  but  into  all  kinds  of  paper  and  credit  repre- 
sentatives. Financial  capital  on  a  large  scale  has  been  in  turn 
a  handmaid  to  each  form  of  economic  activity.  In  the  later 
days  of  classic  Rome  financial  capital  was  closely  connected 
with  land,  the  slaves  being  the  important  form  of  capital.  In 
the  developed  economy  of  the  Orient,  as  well  as  in  the  later 
middle  ages,  financial  capital  was  intimately  related  to  com- 
merce; the  bankers  were  the  merchant  princes.  In  modern 
times  financial  capital  is  more  and  more  associated  with  in- 
dustry: the  "industrials"  are  fast  gaining  even  on  the  rail- 
way or  banking  securities.  Modern  capital  is  predominantly 
industrial  capital. 

138.  Function  of  Capital 

The  aim  of  all  economic  activity  is  to  secure  a  surplus  by 
augmenting  utilities  and  diminishing  costs.  Production  affects 
surplus  in  both  ways,  —  it  increases  the  stock  of  economic 
goods,  or  decreases  the  cost.  Sometimes  it  accomplishes  both 
results.  Capital  as  an  agent  of  production  is  an  efficient  help 
in  this  process. 

The  productivity  of  capital  consists  in  the  aid  which  it  ren- 
ders in  securing  the  same  results  with  less  effort.  It  is  an 
adjunct  to  human  labor,  and  to  that  extent  lessens  labor  by 
interposing  something  between  labor  and  its  result.  The 
function  of  capital  might  therefore  be  called  the  roundabout 
method  of  production.  If  we  need  water,  we  can  go  to  the 
stream  each  time  and  bring  the  water  in  our  hand,  or  w^e  can 
devote  some  of  our  labor  to  constructing  a  pump.  WhUe  we 
are  making  the  pump  we  are  losing  time  and  energy,  but  when 
it  is  finished  there  will  soon  be  an  appreciable  net  saving  or 


§  138]  Function  of  Capital  321 

surplus  of  utility  over  cost.  Instead  of  applying  our  labor 
directly  to  the  stream  we  interpose  the  piece  of  capital  known 
as  a  pump.  The  pump  not  only  pays  for  itself,  but  leaves  a 
surplus,  which  can  now  be  transmuted  into  further  wealth. 
Capital,  then,  is  productive  in  the  same  sense  as  labor.  It  is 
not  indeed  the  cause  of  value  any  more  than  labor  is  the  cause 
of  value.  But  when  labor  brings  about  an  increased  net  sur- 
plus of  utility,  we  call  it  productive;  and  when  capital  does 
the  same,  it  also  is  productive.  If  the  pump  does  not  work, 
that  is,  does  not  increase  the  surplus,  it  will  have  no  value, 
neither  rental  value  nor  capital;  and  since  it  has  no  capital 
value  it  will  not  form  a  part  of  the  aggregate  of  things  which 
are  represented  by  the  fund  of  capital.  But  if  it  does  work, 
that  is,  if  it  is  really  capital,  it  is  productive  because  it  pro- 
duces a  net  surplus  over  and  above  what  would  have  been 
produced  by  unaided  labor. 

The  statement  that  capital  works  through  the  roundabout 
method  of  production  is,  however,  liable  to  misunderstanding. 
In  one  sense  indeed  the  interposition  of  capital  lengthens  the 
period  of  production.  In  former  days  the  cobbler  made  the 
shoe  or  the  blacksmith  the  chain,  and  turned  it  over  almost  at 
once  to  the  consumer;  nowadays  a  long  period  intervenes  be- 
tween starting  the  manufacture  of  a  particular  shoe  or  chain 
and  its  final  delivery  to  the  consumer.  The  process  of  the  suc- 
cessive combination  and  division  of  labor  has  been  brought 
to  its  highest  efficiency  by  the  employment  of  capital.  Capi- 
tal is  needed  for  securing  the  raw  material  in  large  quantities, 
or  providing  the  factory  or  mill  and  the  machinery,  for  the  pay- 
ment of  the  various  classes  of  laborers,  for  the  warehousing  of 
the  product  and  for  its  distribution  to  the  retailer.  The  greater 
the  participation  of  capital,  the  more  roundabout  is  the  process. 

On  the  other  hand,  a  single  process  or  a  definite  part  of  a 
process  can  obviously  be  finished  far  more  rapidly  by  a  ma- 
chine. The  substitution  of  capital  for  labor,  that  is,  the  re- 
placement of  a  hand  by  a  machine,  means  the  cutting  down 


322  Capital  [§  13c 

of  the  time  of  technical  production.  We  thus  seem  to  face 
the  dilemma  that  capital  saves  time  and  loses  time,  and  that  il 
shortens  the  period  of  the  particular  process  and  yet  lengthens 
the  period  of  the  entire  process. 

The  reconciliation  is  simple.  The  individual  machine  saves 
time,  but  to  create  the  machine  takes  time,  so  that  the  whole 
process,  counting  from  the  beginning,  is  lengthened.  The  ma- 
chine is  productive  because  it  turns  out  so  much  more  in  quan- 
tity that  the  value  of  the  entire  product  soon  yields  a  surplus 
over  the  expenditure  of  energy  put  into  the  machine.  That 
is,  from  the  point  of  view  of  aggregate  mass  production  there 
is  a  saving  of  time,  measured  in  terms  of  cost;  from  the  point 
of  view  of  the  single  product  there  is  a  sacrifice  of  time,  which 
is  more  than  offset  by  the  fact  that  the  single  product  is  now 
only  an  insignificant  unit  in  the  mass.  The  value  of  the  unit 
is  a  proportionate  part  of  the  mass. 

In  another  sense,  finally,  the  ascription  of  the  roundabout 
process  to  capital  may  be  reversed.  If  we  regard  not  the 
particular  piece  of  capital,  but  the  fund  of  capital  in  general, 
we  may,  on  the  contrary,  say  that  capital  brings  labor  and  con- 
sumption together.  In  a  large  shoe  factory,  for  instance,  it 
takes  time  to  make  each  shoe;  but  at  any  given  moment  the 
raw  material  is  coming  in  at  one  end  and  the  shoe  is  finished 
at  the  other  end.  Formerly  the  cobbler  made  one  shoe  and 
then  began  on  another;  now  at  the  same  instant  shoes  are 
begun  and  shoes  are  finished.  The  function  of  capital  as  a 
productive  fund  is  therefore  really  to  synchronize  labor  and 
consumption.  The  individual  pieces  of  capital  separate  labor 
and  consumption;  the  fund  of  capital  brings  them  together. 
They  are  two  aspects  of  the  same  thing,  just  as  division  of 
labor  and  combination  of  labor,  seemingly  the  opposites,  are, 
as  we  know,  really  two  sides  of  the  same  process.  To  give  a 
familiar  illustration,  it  is  like  the  reservoir  of  water  used  to  run 
a  mill;  the  individual  drops  come  in  at  one  end  and  go  out 
at  the  other,  but  the  water  remains  at  the  same  level  and  ex- 


§  139]      Creation  and  Growth  of  Capital       323 

erts  its  force  as  a  mass  of  united  drops.  The  individual  pieces 
of  capital  form  the  final  enjoyment;  capital  as  a  whole  per- 
manently invested  units  them.  In  one  sense  capital  involves 
a  roundabout  or  individual  process;  in  another  sense  it  im- 
plies the  most  direct  of  processes. 

139.   Creation  and  Grow^th  of  Capital 

The  root  idea  in  the  conception  of  capital  is  that  of  a  sur- 
plus. In  order  for  anything  to  have  a  capital  value  there  must 
be  a  surplus  of  inchoate  uses.  If  the  fibre  in  an  electric  light 
bulb  wears  out,  the  bulb  possesses  no  further  reserve  uses  and 
loses  its  capital  value.  Again,  if  we  labor  simply  to  provide 
for  our  fleeting  wants  and  consume  all  that  we  produce,  there 
remains  at  the  close  of  each  production  period  no  surplus. 
The  surplus  energy  which  is  transmuted  into  pieces  of  capital 
therefore  comes  ultimately  from  the  decision  of  the  individual 
to  postpone  present  gratifications.  If  instead  of  taking  the 
water  directly  from  the  stream  we  elect  to  spend  our  time  in 
constructing  a  pump,  we  are  creating  a  piece  of  capital.  The 
only  way  in  which  capital  can  be  formed  is  at  bottom  by  saving, 
by  waiting,  by  forbearing. 

The  creation  of  new  capital  is  therefore  the  result  of  pru- 
dence and  forethought.  The  habit  of  saving,  that  is,  of  subor- 
dinating the  present  to  the  future,  is  an  essential  characteristic 
of  progress.  Primitive  peoples  are  spendthrift,  —  they  have 
no  thought  of  the  morrow  and  lay  by  nothing.  There  is  no 
accumulation  of  capital.  Where  the  provision  of  immediate 
needs  occupies  the  whole  of  one's  time,  there  is  no  opportunity 
of  developing  those  higher  qualities  that  make  for  civilization. 
The  formation  of  a  continually  growing  surplus  involves  the 
saving  of  energy  and  the  liberation  of  human  efforts  from  the 
pressing  needs  of  mere  material  existence.  The  growth  of 
capital  means  the  advance  of  civilization,  because  it  implies 
more  efficient  labor,  the  growth  of  leisure  and  the  freedom  to 
turn  attention  to  the  scientific,  esthetic  and  ethical  aims  of  life. 


324  ^     Capital  [§139 

The  destruction  of  capital,  as  in  the  later  days  of  the  Roman 
empire,  spells  a  decay  of  civilization,  because  with  the  weaken- 
ing of  the  economic  foundation  the  whole  superstructure  is 
bound  to  fall.  The  growth  of  capital  is  in  itself  indeed  not 
suflicient  to  engender  the  highest  form  of  civilization,  but  it  is 
a  fundamental  prerequisite.  Not  all  wealthy  communities 
have  been  civilized  in  the  best  sense,  but  there  has  never  been 
great  art,  great  literature,  or  great  science  except  when  there 
has  been  an  abundance  of  capital. 

To  say  that  capital  is  the  result  of  saving  or  forbearance  does 
not  necessarily  imply  any  moral  approbation  of  the  owner  of 
capital.  It  is  for  this  reason  that  it  is  unwise  to  speak,  as  many 
do,  of  abstinence  or  sacrifice  as  the  cause  of  capital  growth. 
A  man  who  already  possesses  an  income  large  enough  to  satisfy 
his  daily  wants,  be  they  great  or  small,  cannot  do  anything 
else  with  his  surplus  except  to  save  it,  and  thus  lead  to  the  for- 
mation of  fresh  capital.  If  he  is  a  maniac,  he  can  of  course 
physically  destroy  it  or  the  money  represented  by  it;  and  if  he 
is  a  fool,  he  can  put  the  capital  to  such  stupid  and  unproductive 
uses  that  it  will  soon  become  worthless  and  disappear  as  an 
embodiment  of  value.  But  unless  he  wastes  capital  in  these 
crude  ways,  he  cannot  help  saving.  He  does  not  abstain  from 
any  present  gratification,  because  this  capital  is  a  surplus  above 
all  present  gratifications.  Abstinence  here  means  abstinence 
from  senseless  waste;  it  is  a  negative,  not  a  positive,  merit. 
Nor  does  he  sacrifice  anything.  As  we  shall  see  later  in  dis- 
cussing the  question  of  interest,  the  problem  is  one  of  marginal 
forbearance,  that  is,  of  sacrifice  at  the  margin  where  he  must 
choose  between  consumption  and  saving.  The  richer  a  man 
is,  the  more  remote  is  the  margin  where  he  will  have  to  decide. 
The  saving  of  one  dollar  means  something  very  different  to  a 
millionaire  and  to  a  day  laborer.  The  essential  point  to  re- 
member is  that  capital  is  a  surplus,  and  that  the  stock  of  capital 
can  be  augmented  only  by  an  excess  of  production  over  con- 
sumption.    The    excess    can   be   formed    only   by   forbearance 


§  139]     Creation  and  Growth  of  Capital       325 

or  postponement,  but  the  forbearance  is  based  on  the  expecta- 
tion of  increased  income.  There  is  no  ethical  merit  attach- 
ing to  the  individual,  although  the  social  consequences  are 
advantageous. 

It  might  be  objected,  finally,  that  if  we  buy  a  railway  share  or 
a  piece  of  land  which  doubles  in  value  during  the  year,  there 
is  an  increase  of  capital  without  any  waiting.  In  reality,  how- 
ever, the  share  rises  in  value  because  it  represents  an  increased 
earning  capacity,  owing  to  the  fact  that  the  railway  is  now 
doing  more  business,  that  is,  adding  more  value  to  the  com- 
modities it  transports,  or,  in  other  words,  creating  surplus 
wealth.  If  the  corporation  elected  to  waste  the  surplus  by 
squandering  it  in  extravagant  salaries  or  palatial  private 
cars  there  would  be  no  excess  available  for  dividends,  and  no 
rise  in  the  price  of  the  security.  In  the  same  way  the  in- 
crease in  the  value  of  the  land  means  that  there  are  more 
individuals  who  have  accumulated  capital  and  who  either  need 
the  land  themselves  or  employ  the  other  human  beings  that 
are  thus  enabled  to  pay  for  the  use  of  the  land.  In  every  case 
the  increase  of  capital,  that  is,  the  creation  of  fresh  capital 
or  capital  value,  implies  an  increased  productivity,  or  a  sur- 
plus somewhere.  Whether  the  individual  owner  of  capital  is 
always  entitled  to  the  particular  surplus  is  quite  another 
question. 

Capital,  then,  is  the  available  stock  of  existing  wealth.  If  a 
part  of  this  stock  is  consumed  and  not  replaced,  capital  is 
diminished;  if  it  is  not  only  replaced,  hut  so  used  as  to  bring 
about  an  increase,  this  surplus  is  the  new  capital.  The  only 
way  to  increase  capital  is  to  refram  from  the  waste  or  immedi- 
ate consumption  of  product.  The  greater  the  existing  stock  of 
capital,  the  easier  is  it  for  the  individual  or  the  community  to 
make  this  election.  The  increase  of  capital  is  therefore  in  last 
resort  due  to  the  growth  of  intelligence.  Where  science  gives 
an  increasing  mastery  over  nature,  the  problem  of  production 
through  the  growth  of  capital  resolves  itself  into  the  intelligent 


326  Capital  [§  140 

selection  of  such  things  as  are  wanted  by  society,  that  is,  to  the 
formation  of  a  constantly  growing  surplus  of  wealth. 

140.  Nature  and  Influence  of  Capital 

Capital,  as  a  socially  important  factor,  is  to-day,  as  we  have 
seen,  industrial  capital.  Ours  is  called  the  capitalist  age,  not 
because  capital  was  unknown  before,  but  because  industry  is 
permeated  through  and  through  with  capitalist  qualities.  Capi- 
tal on  a  small  scale,  consisting  of  a  Httle  surplus,  was  devoted 
to  production  almost  from  the  beginning  of  civilization.  Cap- 
ital on  a  large  scale  was  amassed  in  the  agricultural  and  com- 
mercial enterprises  of  antiquity.  Under  the  economic  conditions 
which  made  for  slavery  and  handicrafts,  however,  there  was  no 
opportunity  to  employ  capital  on  a  large  scale  in  industry; 
and  Vi^ith  the  decreasing  profitableness  of  slavery  and  the 
gradual  restriction  of  the  commercial  frontier,  as  in  later  Rome, 
capital  itself  began  to  dwindle  until  the  whole  economic  and 
political  structure  collapsed. 

After  many  centuries,  capital  was  again  accumulated,  first 
out  of  the  surplus  of  mediaeval  agriculture,  and  then  at  a  more 
rapid  rate  out  of  the  profits  of  the  new  commerce.  The  open- 
ing up  of  the  world  market  in  the  eighteenth  century  made 
possible  the  application  of  this  surplus  to  industry.  From  that 
time  begins  the  prodigious  increase  of  capital  which  charac- 
terizes modern  life.  Now  for  the  first  time  the  real  productive 
force  of  capital  is  realized.  The  surface  of  the  earth  is  a  fixed 
quantity;  a  commerce  based  on  agriculture  and  the  products 
of  hand  labor  can  never  transcend  certain  well-defined  bounds. 
But  the  multiplication  of  commodities  into  the  value  of  which 
the  raw  materials  enter  as  a  minor  factor  is  limited  only  by  our 
failure  to  unlock  the  mysteries  of  nature.  Modern  science, 
modern  technique,  modern  capital,  are  enabling  us  to  explore 
the  innermost  recesses  of  this  unknown  world  and  to  convert 
it  to  industrial  uses. 

Modern  capital  is  therefore  primarily  industrial  capital,  and 


§  i4o]  Nature  and  Influence  327 

since  the  factory  is  the  type  of  modern  industry,  the  capitaHst 
system  may  be  called  the  factory  system.  There  is  indeed 
also  a  capitalist  agriculture,  but  the  characteristic  features  of 
this  are  borrowed  from  capitalist  industry.  Industrial  capital 
may  be  taken  as  the  type. 

The  factory  system  is  sometimes  called  the  machine  system. 
This  is  not  strictly  correct.  In  a  modern  chemical  factory,  for 
instance,  there  may  be  few  or  no  machines  at  all.  What  must 
always  be  present,  however,  in  a  factory  is  some  form  of  auto- 
malic  action,  replacing  hand  labor,  whether  that  action  is  due 
to  forces  of  nature  operating  directly  upon  raw  materials,  or 
indirectly  through  the  medium  of  a  machine.  For  aU  practi- 
cal purposes,  however,  the  machine  may  be  regarded  as  the 
type. 

Industrial  capital  in  this  sense  discloses  three  characteris- 
tics, —  mass  production,  uniformity  and  interchangeability. 

(i)  Capital  becomes  profitable  only  when  there  is  a  mass 
production.  The  supersession  of  hand  by  machine  labor 
involves  such  an  enormous  multiplication  of  output  that  the 
product  must  now  be  sold  en  masse.  The  cotton  print  will 
ultimately  go  to  the  individual  consumer,  but  the  factory 
owner  must  count  upon  the  wholesaler  taking  his  entire  prod- 
uct of  a  day,  a  week  or  a  season.  Even  if  the  factory  owner 
retails  the  goods,  as  for  instance  with  the  Tobacco  Trust  or 
certain  shoe-dealers,  he  must  control  enough  shops  to  take  his 
whole  output. 

(2)  Industrial  capital  implies  uniformity  of  production. 
Hand  labor  gives  free  rein  to  the  individuality  of  the  pro- 
ducer; each  pair  of  shoes  the  cobbler  turns  out  may  differ  in 
some  respect  from  its  predecessor,  and  may  be  prized  on  that 
account.  A  machine  turns  out  the  same  thing  day  after  day, 
and  the  advantages  of  specialization  and  co-operation  are  de- 
rived chiefly  from  this  continual  repetition.  Things  are  made 
according  to  fixed  types,  forms  or  standards.  Hence  there  is 
sometimes  used  the  term  standardization  of  industry.     What  is 


328      .  Capital  [§  140 

meant  is  the  uniformity,  —  the  uniform  repetition  and  pro- 
duction of  the  same  type.  Great  as  has  been  the  ingenuity 
expended  in  differentiating  machinery,  the  result  has  been  only 
a  moderate  multipUcation  of  types,  but  Httle  differentiation  of 
the  individual  products  within  each  type.  There  are  indeed 
different  kinds  of  hats  and  keys,  but  one  Knox  hat  is  almost 
like  another,  and  one  Yale  key  almost  like  its  thousands  of 
fellows. 

(3)  Industrial  capital  also  denotes  interchangeability.  Capi- 
talist division  of  labor  means  that  all  complex  products  are 
made  in  minute  portions.  Through  the  very  fact  of  uniformity, 
one  unit  is  as  good  as  another  of  the  same  class,  and  may  be 
used  interchangeably.  If  some  particular  thing  breaks  in  a 
bicycle  or  a  locomotive,  it  can  be  duplicated  at  once  and  at  a 
minimum  cost.  The  system  of  interchangeable  parts  is 
applied  to-day  even  to  such  products  as  vast  bridges  and  co- 
lossal steamers.  Interchangeability  is  a  corollary  of  uniformity 
and  of  mass  production.^ 

The  deeper  social  influence  of  capital  is  visible  in  these 
characteristics.  Modern  life  means  greater  uniformity.  We 
dress  alike,  we  eat  alike,  we  speak  alike,  we  think  alike. 
Through  capital  we  are  becoming  citizens  of  the  world. 
Old  prejudices  are  destroyed  at  every  turn,  religious  and 
racial  antipathies  diminish,  local  and  even  national  boundaries 
are  overstepped.  Side  by  side  with  these  advantages  appear 
the  dangers.  The  levelling  is  undoubted,  but  if  not  carefully 
guarded  against  it  may  become  a  levelling  down  instead  of 
up.  Uniformity  is  preferable  to  eccentricity  and  vagaries, 
but  a  uniformity  of  mediocrity  is  to  be  deprecated.  The  real 
hope  and  strength  of  the  factory  system  are  that  industrial 
capital  will  so  reduce  cost  and  increase  the  surplus  of  the  in- 

^This  is  explained  in  all  its  details  in  the  Tenth  Census  Report  on 
Power  and  Machinery  by  Professor  Trowbridge,  who  classifies  machine 
tools  into  those  acting  by  compression,  shearing,  paring,  milling,  abrad- 
ing, grinding  and  sawing. 


§  i4i]  Investment  of  Capital  329 

dividual  as  to  enable  him  to  devote  it  to  the  higher  ends  which 
make  for  progress.  > 

141.   Investment  of  Capital 

When  we  speak  of  the  investment  or  application  of  capital, 
we  mean  in  last  resort  the  utilization  of  the  concrete  things 
that  constitute  capital.  These  concrete  things  will  be  used  by 
the  alert  entrepreneur  only  as  long  as  they  yield  the  maximum 
returns;  whenever  something  new  promises  better  results,  it  will 
be  forthwith  substituted.  Perhaps  the  most  striking  fact  in  the 
incipient  lawsuit  of  a  few  years  ago  between  the  great  iron- 
masters, Carnegie  and  Frick,  was  the  revelation  of  the  readi- 
ness with  which  the  former  threw  into  the  scrap  heap  machinery 
almost  new,  costing  millions,  as  soon  as  a  notable  improvement 
had  been  perfected.  This  seeming  destruction  of  capital  on  an 
immense  scale  was  in  reality  an  increase,  profitable  alike  to  the 
producer  and  the  public.  All  physical  investment  of  capital  is 
the  application  of  new  commodities  to  replace  the  old.  The  old 
need  not  be  actually  worn  out;  it  is  sufficient  that  it  should 
have  lost  its  relative  productivity. 

Under  modern  business  conditions  the  investment  of  capital 
is  put  back  a  stage,  and  becomes  the  financial  investment, 
which  renders  possible  the  ultimate  physical  utilization.  Cap- 
ital is  invested  as  a  fund,  to  be  later  transmuted  into  concrete 
things.  Herein  lies  the  significance  of  the  modern  corpora- 
tion. Through  the  medium  of  corporate  securities  a  fund  of 
capital  is  made  mobile  and  active.  The  purchase  by  the 
public  of  a  new  industrial  security  means,  if  the  enterprise  is 
honestly  and  ably  financed,  that  the  proceeds  will  ultimately 
take  the  shape  of  plant  or  working  capital,  that  is,  of  realized 
earning  capacity.  The  function  of  the  promoter,  the  banker 
and  the  underwriting  syndicate  is  at  bottom  legitimate  and 
productive.  If  the  physical  investment  of  capital  is  desirable, 
the  financial  machinery  through  which  this  end  is  attained  is 
similarly  productive.     It  often  requires  far  more  ability  to  raise 


330  Capital  [§141 

the  necessary  funds  at  the  lowest  rate  than  to  turn  out  the 
finished  product  at  rtie  lowest  cost.  Both  investor  and  con- 
sumer may  in  the  end  derive  more  benefit  from  the  successful 
financial  "deal"  than  from  the  best  technical  operation  of  the 
industry.  The  control  of  modern  finance  over  vast  masses  of 
capital  indeed  makes  possible  its  manipulation  for  illegitimate 
ends  on  a  gigantic  scale.  But  these  abuses  must  not  blind  us 
to  the  essentially  productive  character  of  the  services  of  the 
financiers  as  the  intermediaries  between  financial  and  indus- 
trial capital. 

Since  the  ownership  of  the  concrete  pieces  of  capital  is 
coming  more  and  more  to  be  represented  by  these  corporate 
securities,  their  character  becomes  of  considerable  importance. 
Technically  they  are  divisible  into  stocks  and  bonds.  The 
share  of  stock  represents  legally  the  proportionate  part  of  the 
corporation  which  owns  the  corporate  assets.  When  there 
are  no  bonds,  the  stock  is  entitled  to  all  the  profits.  Fre- 
quently the  stock  is  divided  into  preferred  and  common  shares, 
the  former  sometimes  being  a  cumulative  stock,  so  called 
because  if  dividends  are  passed  they  accumulate  and  must  be 
paid  subsequently  before  the  common  stock  receives  anything. 
Opposed  to  the  stock  is  the  bond;  the  property  of  the  corpora- 
tion is  mortgaged  to  the  bondholders,  who  receive  interest  on 
the  bond  until  the  expiration  of  the  mortgage.  If  there  is  any 
default  in  the  interest,  the  property  covered  by  the  mortgage 
can  be  sold  to  satisfy  the  debt;  In  England,  where  mortgage 
bonds  are  unknown,  their  place  is  taken  by  the  debenture 
stock,  the  difference  being  that  the  holder  has  the  right,  in 
case  of  default,  to  reimburse  himself  by  levying  upon  some 
item  of  the  company's  property.  Bonds  are  first,  second, 
third  or  further  mortgage  bonds  according  to  the  priority  of 
the  lien.  Where  a  rate  of  interest  is  contingent  upon  earnings, 
the  bond  is  an  income  bond.  Sometimes  the  bonds  are  con- 
vertible into  stock,  and  hence  called  convertible  bonds.  When 
smaller  corporations  are  merged  into  a  larger  one  or  when  a 


§  i4i]  Investment  of  Capital  331 

corporation  seeks  to  avoid  mortgaging  its  own  property,  the 
original  bonds  are  put  in  trust  as  collateral,  and  a  new  issue  is 
made  under  the  name  of  collateral  trust  bonds  or  simply  trust 
bonds.  Although  such  an  issue  is  not  technically  a  mortgage 
on  the  real  estate,  it  is  so  practically,  since  a  recourse  can  always 
be  had  through  foreclosure  to  the  underlying  mortgage  securities. 

In  legal  theory  the  stock  represents  the  ownership,  and  the 
bond  a  Hmited  interest  in  the  enterprise.  In  actual  fact,  under 
recent  financial  development,  where  the  original  cost  or  outlay 
is  often  defrayed  out  of  the  proceeds  of  the  mortgage  indebt- 
edness, the  stock  has  come  to  represent  the  speculative  interest 
in  the  venture,  while  the  bond  represents  the  actual  proprietor- 
ship. This  economic  reversal  of  the  legal  situation  is  most 
clearly  marked  in  the  railways,  but  is  also  visible  in  ordinary 
industrial  enterprises.  As  a  consequence  there  has  frequently 
developed  an  antagonism  of  interest,  not  only  between  bond- 
holder and  stockholder,  but  also  between  the  main  body  of 
investors  and  the  directorate.  In  some  states  the  issue  of 
bonds  is  restricted  to  a  proportion  of  the  stock  or  of  the  prop- 
erty, or  otherwise  limited;  in  other  cases  the  bondholders  are 
given  voting  power;  in  still  other  instances  the  principle  of 
minority  representation  is  introduced  to  safeguard  the  interests 
of  the  stockholders.  The  English  law  of  1900  and  the  recent 
Massachusetts  law  are  perhaps  the  most  advanced  examples 
of  Anglo-Saxon  legislation  to  protect  the  varying  interests  of 
different  classes  of  investors. 

The  proper  method  of  managing  the  investment  in  vast  cor- 
porate enterprises  has  assumed  such  importance  that  it  has  well- 
nigh  become  a  separate  discipline  under  the  name  of  corporate 
finance.  It  included  such  topics  as  accounting,  the  issue  and 
marketing  of  securities,  the  funding  policy,  the  accumulation  of 
surplus  and  reserves,  and  many  more.  In  a  comprehensive 
treatise  on  economics  these  would  all  need  explanation.  They 
must  here  be  passed  over  with  a  mere  mention.  The  influence 
of  the  proper  investment  of  capital  is  by  no  means  confined  to 


332  Capital  [§  141 

the  investor.  Primarily  indeed  he  seems  to  be  affected.  He 
must,  however,  be  regarded  as  the  channel  through  which 
society  as  a  whole  increases  its  fund  of  capital  and  its  resulting 
control  of  nature.  The  investor,  as  opposed  to  the  reckless 
speculator,  is  as  effectively  an  agent  of  society  as  any  individual 
producer.  The  one,  like  the  other,  may  think  that  he  is  pursuing 
his  own  interest,  but  he  will  generally  also  be  subserving  the 
common  interest.  If  the  producer  turns  out  something  that 
the  community  really  wants,  he  will  benefit  society  as  well  as 
himself;  if  the  investor  exercises  sagacity  in  the  application  and 
control  of  his  investment,  he  will  tend  to  save  the  community 
the  risk  of  misdirected  energy  and  the  wastes  of  failure. 

The  proper  financial  control  of  the  fund  of  capital  is  no  less 
important  than  the  proper  apphcation  of  the  concrete  pieces 
of  capital  to  industry,  trade  or  agriculture.  Upon  the  eco- 
nomic investment  of  capital,  in  the  broadest  sense,  depends  in 
large  measure  the  prosperity  of  all  classes. 


L 


CHAPTER  XXII 
ENTERPRISE  —  THE    CONCENTRATION    OF    PRODUCTION 

142.   References 

W.  S.  Stevens,  Industrial  Combinations  and  Trusts  (1913);  W.  Z. 
Ripley  (ed.),  Trusts,  Pools  and  Corporations  (1916);  J.  W.  Jenks,  The 
Trust  Problem  (191 7);  R.  T.  Ely,  Monopolies  and  Trusts  (191 2);  H. 
W.  Macrosty,  The  Trust  Movement  in  British  Industry  (1907);  J.  Moody, 
The  Truth  about  the  Trusts  (1904);  J.  E.  Le  Rossignol,  Monopolies,  Past 
and  Present  (1901);  A.  Marshall,  Principles  of  Economics  (1910),  bk. 
iv,  chs.  X,  xi;  E.  S.  Meade,  Trust  Finance,  (1903)  ch.  iii;  E.  D.  Durand, 
The  Trust  Problem  (1915);  D.  H.  MacGregor,  Industrial  Combinations 
(1906);  H.  Levy,  Monopoly  and  Competition  (1911);  United  States 
Industrial  Commission,  Report,  I,  II,  XVIII,  XIX,  595-722;  Ida  Tarbell, 
History  of  the  Standard  Oil  Company  (2  vols.,  1904);  H.  R.  Mussey, 
Combination  in  the  Mining  Ituiuslry  (Columbia  5/z<(//c5,  XXIII,  1905); 
M.  Jacobstein,  The  Tobacco  Industry  in  the  United  Stales  {Ibid.,  XXVI, 
1907);  A.  Berglund,  The  United  States  Steel  Corporation  {Ibid., 
XXVII,  1907);  G.  H.  Montague,  The  Rise  and  Progress  of  the  Standard 
Oil  Cotnpany,  (1903);  W.  J.  Brown,  The  Prevention  and  Control  of 
Monopolies  (1914);  H.  W.  Quaintance,  Influence  of  Farm  Machinery 
on  Production  and  Labor  (1904);  Bureau  of  Corporation  Reports  on 
the  Beef,  Petroleum,  Toba-cco  and  Steel  Irulustrics  (1905-1915);  S.  S. 
Huebner,  Report  [of  the  Committee  on  the  Merchant  Marine  and 
Fisheries]  on  Steamship  Agreements  and  Affiliations  in  the  American 
Foreign  and  Domestic  Trade  (1914). 

143.    The  Meaning  of  Concentration 

Enterprise  is  in  one  sense,  as  we  have  seen  (§  121),  a  spe- 
cies of  labor.  In  reality,  however,  it  has  come  to  mean  that 
kind  of  labor  which  is  carried  on  independently,  instead  of  for 
a  stipulated  reward.  Strictly  speaking,  it  is  not  identical  with 
management,  for  the  manager  of  a  business  may  be  hired  at  a 
definite  salary.  Enterprise  is  management  plus  risk;  that  is, 
it  involves  the  independent  conduct  of  a  business,  with  all  the 
chances  of  profit  or  loss.     We  have  already  discussed  the  his- 

2,32, 


334  ■  Enterprise  [§  144 

torical  forms  of  enterprise  (chap.  vi).  In  modern  times  the 
pre-eminent  fact  of  business  enterprise  is  the  tendency  to  con- 
centration. A  study  of  modern  business  enterprise  thus  becomes 
virtually  a  study  of  concentration. 

In  approaching  the  problem  of  concentration,  we  must 
distinguish  between  the  concentration  of  wealth,  the  concen- 
tration of  production  and  the  monopoly  of  production.  Con- 
centration of  wealth  is  essentially  an  individual  phenomenon 
in  the  sense  that  any  one  may  acquire  wealth  from  independ- 
ent and  relatively  insignificant  sources.  A  rich  landlord  may 
own  a  large  number  of  small  tracts;  a  wealthy  capitalist  may 
secure  his  returns  from  many  investments  in  minor  enterprises. 
Concentration  of  production,  on  the  other  hand,  means  either 
that  the  units  themselves  are  increasing  in  size,  as  in  the  case 
of  larger  farms  or  factories,  or  that  they  are  combined  with 
other  units  under  more  or  less  centralized  management,  as  in 
the  case  of  enterprises  technically  separate,  but  subject  to  the 
same  financial  control.  Where  an  individual  owns  the  produc- 
tive factors,  concentrated  production  involves  concentrated 
wealth;  where  the  business  enterprise  assumes  a  corporate 
form,  concentrated  production  is  compatible  with  a  diffusion 
of  wealth  among  the  security  holders. 

Concentration  of  production,  again,  is  not  necessarily  a  mo- 
nopoly of  production.  The  size  of  the  units  may  increase,  but 
there  may  still  be  rivalry  between  them.  Bonanza  farms, 
department  stores  and  great  corporations,  each  representing  an 
undoubted  concentration  of  production,  may  yet  suffer  keen 
competition  from  their  rivals.  It  is  only  when  concentration 
has  reached  the  stage  where  a  single  business  enterprise  per- 
manently supplies  so  large  a  percentage  of  the  entire  output 
as  to  control  the  price  that  we  can  speak  of  a  virtual  monopoly. 
In  such  a  case  indeed  there  may  be  technical  competitors,  but 
the  competition  is  practically  inoperative. 

Concentration  of  production  may  be  predicated  of  each  of 
the  three  factors,  —  labor,  land  and  capital. 


§  144]  Large-Scale  Production  335 

(i)  The  concentration  of  labor  as  an  independent  phe- 
nomenon is  not  important.  After  a  certain  low  limit  of  co- 
operation has  been  reached  the  profitableness  of  an  increased 
force  of  laborers  depends  on  the  acquisition  of  more  land  or 
the  utilization  of  more  capital.  Not  only  must  wages  be  ad- 
vanced, but  the  output  must  be  disposed  of.  For  these  and 
similar  purposes  capital  is  required.  Concentration  of  labor 
is  thus  dependent  upon  concentration  of  land  or  of  capital. 

(2)  Concentration  of  land  varies  with  the  kind  of  land.  In 
grazing  and  agricultural  land,  modern  economic  forces,  as  we 
shall  see  (§  145)  are  opposed  to  concentration;  so  far  as  it  exists, 
it  rests  upon  the  application  of  capital  to  land.  In  mineral  and 
forest  lands,  when  we  observe  a  tendency  toward  concentration 
it  will  often  be  found  that,  as  in  the  case  of  iron,  coal  and  cop- 
per, the  product  forms  an  important  raw  material  for  closely 
related  industries,  and  that  the  land  concentration  is  a  result  of 
the  industrial  concentration.  Finally,  in  urban  lands,  whether 
the  sites  are  owned  in  large  or  in  small  plots  has  no  bearing 
on  the  price.  Thus,  while  the  concentration  of  land  may  be 
important  in  distribution,  it  is  as  a  factor  in  production  either 
non-existent,  insignificant  or  dependent  on  that  of  capital. 

(3)  Concentration   of   production   hence   resolves   itself   into 

concentration    of    capital    as    the    dominating    force.      Of    this 

again,  there  are  two  categories,  —  large-scale  production  in  the 

narrower  sense  and  capitalist  consolidation  and  integration  in 

the  wider  sense.     Large-scale  production  is  the  result  of  the 

change  in  the  normal  business  unit  brought  about  directly  by 

modern    machinery.     Capitalist    consolidation    and    integration 

are  the  result  of  the  more  important  changes  effected  by  the 

application  of  great  masses  of  financial  capital  to  industry  and 

commerce  in  general.     Each  of   these  must   be  considered  in 

turn. 

144.  Large-Scale  Production 

Large-scale  production  might  also  be  called  the  concentra- 
tion of  employment.     It  means  that  the  business  unit,  whether  a 


33^  Enterprise 


144 


manufacturing  establishment,  a  commercial  enterprise  or  a  farm, 
employs  a  large  amount  of  capital,  and  as  a  consequence  in  some 
cases  also  a  large  amount  of  labor  or  of  land.  The  ordinary  ex- 
ample is  that  of  the  modern  factory  contrasted  with  the  shop  or 
handicraft  system  of  former  times.  We  find  isolated  instances 
of  large-scale  industrial  production  in  earlier  ages,  but  with  the 
advent  of  machinery  it  has  become  the  type  instead  of  the 
exception.  Beginning  in  the  textile  industries  in  England  at 
the  close  of  the  eighteenth  century,  it  soon  spread  to  the  most 
important  trades,  although  there  still  exist  to-day  industries  in 
which  an  unequal  contest  is  being  waged  between  the  domes- 
tic and  the  factory  systems.  On  the  European  continent  the 
transition  came  somewhat  later,  and  in  Germany  to-day  the 
so-called  petty  industry  (Kleinbetrieb)  still  makes  a  respectable 
showing.  In  the  United  States,  although  we  find  a  beginning 
of  large-scale  industry  in  the  textiles  after  the  war  of  181 2,  it 
was  not  until  after  1850  that  the  transition  from  the  hand 
trades  assumed  any  importance,  and  not  until  after  the  civil 
war  that  the  tendency  toward  concentration  into  large  estab- 
lishments became  very  marked. 

The  distinction  between  small-scale  and  large-scale  produc- 
tion is  not  precisely  equivalent  to  that  between  hand  trades 
and  manufactures.  The  building  trades  are  generally  put  in 
the  former  category,  and  yet  they  are  often  conducted  on  a 
large  scale.  On  the  other  hand  the  factory  may  be  a  small 
one.  Out  of  512,254  establishments  reported  in  the  Twelfth 
Census,  215,814  represented  hand  trades.  In  32,382  of  these 
from  5  to  20  persons  and  in  7,773  over  20  persons  were  em- 
ployed. On  the  other  hand,  out  of  296,440  establishments, 
in  about  one-seventh  (41,687)  the  proprietor  was  the  only 
workman,  and  in  about  one-half  of  the  remainder  (125,890) 
the  number  of  employes  was  under  5.  Nevertheless  large- 
scale  production  may  be  declared  to  be  virtually  the  result  of 
the  factory  system  with  its  use  of  machinery,  its  mass  produc- 
tion and  its  standardization.     In  most  of  the  hand  trades,  like 


I 


§  144] 


Large-Scale  Production 


337 


carpentry,  plumbing,  custom  tailoring  and  custom  boot-making, 
we  have  a  small-scale  production;  while  the  building  trades 
which  form  the  chief  exception  are  nowadays,  through  the  use 
of  machinery,  the  purchase  en  masse  of  raw  materials,  and  the 
employment  of  large  capitals  and  great  numbers  of  workmen, 
in  reality  more  akin  to  the  factory  system.  While  many  small 
factories  are  still  being  continually  started,  the  tide  is  setting 
strongly  toward  an  increase  in  the  size  of  the  unit. 

In  the  United  States  the  maximum  number  of  manufactur- 
ing establishments  in  many  branches  was  reached  in  1870; 
since  that  time  the  number  has  been  in  some  cases  actually 
diminished,  while  in  all  cases  the  average  capital  invested,  the 
number  of  employes  and  the  value  of  the  product  per  unit 
have  steadily  risen.  The  following  table  illustrates  the  great 
;  increase  of  large-scale  production: 


Industries. 

Number  of 
Establish- 

Average per  Establishment. 

ments. 

Capital. 

Number  of 
Workmen. 

Value  of  Product. 

1870. 

1900. 

1870. 

1900. 

1870. 
103 

12 

56 

28 

5 

1900. 

1870. 

I  goo. 

Iron  and  Steel     .    , 
AKricultural       Im- 
plements   .    .    . 
Carpets  and  Rugs 
Woollen  Goods     . 
Leather 

726 

2,076 

215 

2,891 

7,569 

668 

715 

133 

1,035 

1,306 

$161,523 

16,780 

58,329 

34,184 

8,076 

$858,371 

220,571 
334,205 
120,180 
131,214 

133 

6s 

214 

67 

40 

$274,878 

25,080 

101,217 

53,755 

20,774 

$1,203,545 

141.54c 
362.349 
114,425 
156,231 

This  method  of  presentation  of  averages  fails  to  show  the  real 
significance  of  the  change,  as  it  includes  the  small  as  well  as  the 
large  factories.  If,  however,  the  number  of  workmen  is  taken 
as  an  evidence  of  concentration,  it  appears  that  a  little  over 
eight  per  cent  of  all  the  factories  reporting  employ  about 
seventy-five  per  cent  of  the  total  number  of  workmen.  In  a 
single  iron  and  steel  mill  in  Ohio  there  were  7,477  employees; 
in  a  cotton  mill  in  New  Hampshire,  7,268;  in  an  agricultural 
implement  factory  in  Illinois,  6,728;  in  an  electrical  supply 
factory  in  Pennsylvania,  6,318  workmen.  Moreover,  as  ap- 
pears from  the  preceding  table,  the  investment  of  capital  and 
22 


338  Enterprise  [§145^ 

the  value  of  the  output  increase  far  more  rapidly  than  the 
number  of  workmen.  According  to  the  census  of  1910  a 
little  over  one  per  cent  of  the  number  of  manufacturing  establish- 
ments were  responsible  for  43.8  per  cent  of  the  total  value  of 
products  and  for  30.5  per  cent  of  all  wage  earners. 

145.   Large-Scale  Agriculture 

Where  agriculture  depends  chiefly  on  the  labor  of  the  farmer, 
aided  by  comparatively  primitive  implements,  the  size  limit  of 
profitable  farming  is  soon  reached.  In  the  middle  ages,  even 
with  co-operative  or  communal  farming,  the  prevalence  of  the 
three-field  system  restricted  the  size  of  individual  strips.  In 
more  modern  times  we  find  either  the  small  plots  of  the 
European  peasant  proprietor  or  the  somewhat  larger  tracts  of 
fresher  land  of  the  early  American  farmer. 

Farming  on  a  large  scale  becomes  possible  only  when  capi- 
talist methods  are  employed.  In  former  times  these  methods 
were  supplied  by  slavery,  as  in  the  latifimdia  of  later  repub- 
lican Rome  and  in  the  ante-bellum  plantations  in  the  South. 
The  slave,  however,  was  to  all  intents  and  purposes  a  species 
of  capital  or  machinery  —  even  though  a  human  machine. 
When  slavery  disappeared,  a  new  era  of  small  farms  was 
ushered  in,  and  whatever  tendency  to  large-scale  farming  is  . 
found  to-day  is  due  in  great  measure  to  the  application  of 
industrial  capital  in  the  shape  of  farm  machinery  and  capital- 
ist methods  of  transportation. 

The  home  of  farm  machinery  is  in  the  United  States.  Its  ; 
coming  was  somewhat  later  than  in  the  case  of  the  other  more 
important  productive  enterprises.  Whitney's  cotton  gin  and 
Newbold's  cast-iron  plough  were  invented  at  the  close  of  the 
eighteenth  century,  but  it  is  only  since  the  civil  war  that  farm 
machinery  has  been  used  on  a  large  scale.  The  increase  in 
the  production  of  agricultural  implements  in  the  United  States ' 
is  illustrated  by  the  following  figures:  1850,  $6,842,611;  i860, 
$20,831,904;    1890,  $81,271,651;    1910,  $146,329,000. 


§  145] 


Large-Scale  Agriculture 


339 


In  the  large  farms  of  the  far  West  fifty-horse-power  traction 
engines  are  now  used  to  pull  at  one  season  a  train  of  great 
ploughs,  harrows  and  press  drills  for  planting,  and  at  another 
immense  harvesting-machines,  automatic  rakers  and  threshers. 
In  the  Central  states  we  find  check-row  planters,  riding-ploughs, 
steam  corn-huskers  and  shellers,  mowing-machines,  potato 
planters  and  diggers,  manure-spreaders,  feed-choppers  and 
grinders  and  ditch-digging  machines  —  to  mention  only  a  few 
of  the  newer  implements.  The  saving  of  labor,  the  prodigious 
increase  of  output  and  the  lessening  of  cost  go  far  to  explain 
the  competition  of  American  farm  products  in  the  European 
markets,  despite  the  great  obstacle  of  distance. 

The  influence  of  machinery  in  increasing  wages,  shortening 
hours  of  work,  lightening  the  tasks  of  women  and  children  and 
raising  the  general  standard  of  life  of  the  farmer  as  well  as  of 
his  hands  is  so  universally  recognized  that  it  needs  no  statis- 
tical proof  or  explanation.  What  interests  us  here  is  its  effect 
upon  the  size  of  farms. 

It  is  obvious  that  considered  by  itself  expensive  machinery 
becomes  profitable  only  when  applied  to  large  stretches  of  land. 
This  is  evident  from  the  following  table  giving  the  average 
number  of  acres  of  improved  land  per  farm: 


1850 

i860 

1S70 

18S0 

iSgo 

igoo 

1910 

United  States  .... 

78.0 

79.8 

71.0 

71.0 

78.3 

72.2 

75-2 

New  England  .... 

66.5 

66.4 

66.4 

63-4 

56..^ 

42.4 

38.4 

Middle  Adantic  .  . 

70.8 

70.3 

69.2 

68.0 

67.4 

63-4 

62.6 

E.  North  Central 

62.2 

70.2 

72.1 

76.7 

78.1 

71-3 

79.2 

W.  North  Central 

54-3 

60. 

64.7 

85-9 

II5-3 

127.9 

148. 

South  Atlantic  .  .  . 

120.9 

115.6 

80.7 

56.1 

.15-6 

47-9 

43-6 

E.  South  Central  . 

85.1 

95-5 

65.1 

54-1 

54-5 

44-5 

42.2 

W.  South  Central. 

69-5 

74.0 

49.4 

59-9 

70.9 

52-7 

61.8 

Mountain  

39-0 

27-3 

41.8 

88.4 

110.5 

82.9 

86.8 

Pacific 

81.2 

^33-3 

218.6 

227.6 

227.6 

132.S 

116. 1 

In    the    North    Central    division,    the    chief    home    of    farm 
machinery,  the  increase  is  marked.     The  average  for  the  whole 


340 


Enterprise 


[§  145 


country,  however,  is  kept  down  by  the  fact  that  as  a  general 
rule  land  values  tend  to  rise  with  growing  prosperity.  A  given 
capital  thus  represents  a  constantly  diminishing  acreage,  and 
it  becomes  increasingly  profitable  to  apply  more  labor  and 
minor  machines  to  small  areas  rather  than  large  capital 
and  vast  machines  to  great  areas.  That  is,  we  have  a  tendency 
to  intensive,  rather  than  large-scale,  farming.  The  final  con- 
sequence is  a  resultant  between  the  two  forces  of  growing 
productivity  of  machinery  and  increase  of  land  values. 

The  table  below  gives  the  average  acreage  of  the  entire  farm: 


Division. 

1850. 

1870. 

1880. 

1890. 

1900. 

1910. 

United  States      .     .     . 

202.6 

153-3 

133-7 

136-5 

146.2 

1 38. 1 

New  England       | 
Middle  Atlantic  ) 

1 1 2.6 

104.3 

97-7 

(  104.0 
1    91-7 

107. 1 
92.4 

104.4 
92.4 

South  Atlantic    .     .     . 

376-4 

241. 1 

157-4 

133-6 

108.4 

93-3 

East  North  Central    | 

(  104.8 
)  164.8 

102.4 

105.0 

West  North  Central  ( 

143-3 

123.7 

121.9 

189.5 

209.6 

East  South  Central    ^ 

150.6 

\  1205 

89.Q 

78.2 

West  South  Central  J 

291.0 

194.4 

(  179-7 

233-8 

179-3 

Mountain  ) 

Pacific        ^      •     •     •     ■ 

694.9 

3364 

312.9 

(  298.9 
(  337-0 

457-9 
334-8 

324-5 
270.3 

It  will  be  observed  that  up  to  1880  there  was  a  movement 
toward  smaller  farms.  Since  1880,  the  era  of  the  introduction 
of  machinery  on  a  large  scale,  the  forces  have  about  balanced 
each  other  in  the  New  England,  Middle  Atlantic  and  East 
North  Central  divisions,  while  in  the  South  Atlantic  division 
machines  outside  of  the  cotton  gin  have  been  found  well  nigh 
inapplicable,  and  the  old  slave  plantations  have  been  gradu- 
ally broken  up  into  small  farms.  In  the  West  North  Central 
division  not  only  has  the  use  of  machinery  increased,  but 
the  opening  up  of  vast  stretches  of  grazing  land  contributed 
to  increase  the  average  size  of  the  farms.  With  the  growing 
importance  of  land  values  the  trend  in  the  West  has  now  begun 
to  conform  to  that  in  the  East.     In  1910  over  82  per  cent  of 


§  146]      Consolidation  and  Integration  341 


all  the  farms  were  under  175  acres.  The  tendency  for  the 
small  farms  to  increase  is  shown  by  the  following  table  of  per- 
centage in  acres: 


Under  10. 

10-20. 

20-50. 

So-ioo. 

100-500. 

500-1000. 

1 000  and 
over. 

1880 

1890 
1900 

I9I0 

3-5 
3-3 
47 

13 

.1 

195 
19.8 
21.9 

22.3 

246 

23.8 

22.6 

42.3 
44.0 

39-9 
39-3 

1.9 

1-9 

1.8 

2.0 

0.7 
0.7 
0.8 

o.S 

The  same  movement  is  discernible  even  in  the  Western  and 
North  Central  divisions,  where,  notwithstanding  a  slight  increase 
in  the  largest  farms,  there  has  been  a  considerably  greater 
increase  in  the  smaller  farms.  The  conclusion  is  that  large- 
scale  production  is,  even  in  the  United  States,  far  less  appli- 
cable to  agriculture,  than  to  industry,  chiefly  because  the  lower 
cost  resulting  everywhere  from  machinery  is,  in  the  case  of 
agriculture,  partly  counterbalanced  by  the  increase  in  land 
values  and  the  consequent  changes  in  cultivation. 

146.   Consolidation  and  Integration  of  Production 

Side  by  side  with  the  immediate  effects  of  machinery  in 
enlarging  the  size  of  the  individual  business  unit,  we  have  the 
broader  phenomenon  of  the  capitalistic  combination  of  produc- 
tion. This  is  of  two  kinds:  first,  the  consolidation  of  like  units 
into  a  larger  whole,  as  in  the  union  of  separate  shipping  lines 
into  the  International  Marine  Company;  and  second,  the  inte- 
gration of  unlike  units,  as  the  union  of  such  originally  dilTerent 
enterprises  as  mines,  transportation  companies,  factories  and 
mills  into  the  United  States  Steel  Corporation. 

Combinations  of  capital  have  gone  through  several  phases 
known  respectively  as  agreements,  pools  and  trusts,  each  being 
further  divisible  into  two  or  more  classes. 

(i)  The  earliest  form  is  the  agreement  of  independent 
concerns  to  fix  prices.     This  is  the  first  natural  effort  to  in- 


342  Enterprise  [§  146 

crease  profits  by  restricting  competition.  It  is  found  almost 
from  the  beginning  of  business  enterprise.  Its  obvious  weak- 
nesses are  the  lack  of  any  adequate  penalty  to  prevent  under- 
cutting by  any  one  of  the  parties  to  the  agreement;  and  the 
inducement  which  the  ensuing  high  profits  hold  out  to  new  com- 
petitors. In  the  American  railway  business  this  plan,  whether 
in  the  form  of  the  earlier  traffic  arrangements  or  in  that  of 
the  later  presidents'  agreements,  never  proved  effectual.  In  gen- 
eral industry  its  efficacy  has  proved  to  be  limited  and  doubtful. 

(2)  The  next  step  is  the  agreement  to  divide  the  field, 
each  enterprise  contracting  to  limit  its  activity  to  a  particular 
section.  This  plan  also  is  subject  to  difficulties,  except  in  cases 
where  the  first  comer  possesses  undoubted  advantages  through 
the  mere  fact  of  priority.  The  most  familiar  examples  are  the 
American  express  companies  and  the  French  railways,  although 
even  here  there  is  some  competition  on  the  fringe  of  each 
field.  Division  of  the  field,  however,  is  in  most  cases  only  a 
stage  in  the  formation  of  a  closer  union,  as  in  the  so-called 
rival  gas  or  electric  light  companies. 

(3)  The  third  phase  is  the  pool,  or  the  attempt  to  restrict 
the  output,  rather  than  the  price  or  the  field.  The  pool  is  so 
named  because  the  receipts  are  put  into  a  common  fund  or 
pool,  each  member  of  the  combination  having  an  allotted  per- 
centage of  production.!  Ordinarily  this  takes  the  form  of  a 
money  pool,  the  excess  or  deficiency  in  each  case  being  paid 
in  cash.  Occasionally,  as  in  some  of  the  railway  trafiic-pools, 
the  output  itself  is  diverted  from  one  member  to  another. 
When  this  apportionment  is  accomplished  by  secret  favors  to 
individuals,  like  the  cattle,  hog  and  oil  "eveners,"  the  abuses 
become  notorious.  Frequently  the  equilibrium  is  brought 
about  by  a  fine  on  the  excess  production,  instead  of  a  technical 
pooling  of  the  output  or  the  proceeds.  Here,  again,  the 
temptations   covertly   or   openly    to    exceed    the   allotment    in 

1  The  industrial  pool  must  not  be  confused  with  the  financial  pool, 
used  for  speculative  purposes  in  the  stock  exchange. 


I 


§  146]       Consolidation  and  Integration         343 

order  to  secure  greater  immediate  profits  or  to  furnish  an  argu- 
ment for  a  larger  percentage  at  the  next  distribution  is  fre- 
quently too  strong  to  be  resisted.  To  this  danger  the  whisky 
pool,  the  beam  pool  and  many  others  succumbed. 

(4)  Sometimes  the  pool  combines  both  features,  the  fix- 
ing of  price  as  well  as  of  output.  Occasionally  it  goes  still 
further  and  under  the  name  of  selling  bureau  or  agency 
constitutes  a  fourth  phase.  The  selling  bureau  not  only  fixes 
prices  and  output,  but  often  manages  the  entire  business  of 
selling,  taking  all  orders  and  distributing  the  respective  allot- 
ments to  each  member.  Many  of  the  German  Cartcllcn  are  of 
this  nature,  although  in  some  cases  they  are  nothing  but  ordi- 
nary pools.  Of  the  same  character  are  the  Michigan  Salt 
Association,  originally  formed  in  1876,  and  many  of  the  French 
comptoirs  or  syndicals.  The  weakness  of  the  pooling  arrange- 
ments is  not  only  their  instability,  but  also  the  fact  that,  in 
Anglo-Saxon  countries  at  least,  their  provisions  are  unen- 
forceable  because   repugnant   to   the  common  law. 

(5)  The  fifth  stage  was  reached  in  1882  by  the  formation 
of  the  Standard  Oil  Trust,  so  called  because  the  constituent 
enterprises  turned  over  their  business  to  a  board  of  central 
trustees,  receiving  in  return  trust  certificates  for  the  shares  of 
stock  turned  over  and  abandoning  to  the  "trust"  the  entire 
operation  of  the  business.^  Although  the  Whisky  (1887),  the 
Sugar  and  other  trusts  rapidly  followed,  the  scheme  was  soon 
found  to  conflict  with  the  law.  In  1890  the  Sugar  Trust  was 
held  to  be  illegal  in  New  York,  and  the  same  fate  befell  the 
Standard  Oil  Trust  in  1892  in  Ohio.  As  a  consequence  the 
original  trusts  were  dissolved,  and  the  constituent  enterprises 
were  now  combined  in  a  new  and  still  more  effective  way. 

(6)  The  sixth  form  is  called  the  holding  corporation. 
The  original  members  of  the  combination  are  first  organized 
as   corporations,   each   maintaining   its   separate   existence.     A 

'  The  industrial  trust  must  not  be  confused  with  the  trust  company, 
any  more  than  the  industrial  pool  with  the  stock  exchange  pool. 


344  Enterprise  [§  146 

new  central  corporation  is  then  formed  to  buy  up  or  hold  the 
stock,  or  at  least  a  majority  interest,  of  the  individual  corpora- 
tions. On  the  basis  of  the  income  received  from  the  constit- 
uent companies,  the  parent  corporation  issues  its  securities,  and 
while  each  plant  or  business  is  operated  as  a  separate  unit,  its 
capacity  is  virtually  controlled  by  the  directory  of  the  parent 
company.  It  is  the  trust  in  a  new  and  more  effective  form, 
preserving  the  unity  of  the  old,  but  adding  a  certain  flexibility 
and  responsibility.  In  its  original  form,  something  like  the 
holding  corporation  is  found  in  isolated  instances  in  an  earlier 
period,  as  in  the  case  of  the  Pennsylvania  Company  in  1870, 
the  Bell  Telephone  Company  in  1880,  and  the  Southern  Pacific 
Company  in  1884.  In  the  early  nineties  the  United  States 
Rubber  Company  and  the  reconstructed  Sugar  Trust  assumed 
this  form.  All  these,  however,  were  organized  under  special 
laws  in  the  various  states;  the  general  legality  of  one  corpora- 
tion holding  the  stock  of  another  was  first  made  possible  by  the 
New  Jersey  corporation  act  of  1899.  This  led  to  a  sudden  ac- 
tivity in  the  formation  of  new  corporations  as  holding  companies. 
Among  the  first  to  take  advantage  of  the  law  were  the  Amal- 
gamated Copper  Company  and  the  Standard  Oil  Company, 
which  in  the  interval  since  1892,  after  the  alleged  trust  had 
been  declared  illegal,  had  continued  in  a  somewhat  formless  ■ 
but  none  the  less  effective  consolidation  through  a  division  of  i 
the  shares  of  the  various  constituent  companies  among  a  few. 
individuals,  who  had  been  trustees  of  the  old  trust.  In  1901 1 
the  United  States  Steel  Corporation  was  formed,  followed  in 
1902  by  the  Mercantile  Marine  Company  and  the  International  I 
Harvester  Company,  and  in  1904  by  the  American  Tobacco 
Company.  The  attempt  to  apply  the  same  method  to  still  | 
larger  combinations  of  railways,  as  in  the  case  of  the  Northern 
Securities  Company  in  1901,  failed  because  of  special  prohibitive 
legislation  to  which  attention  will  be  directed   hereafter. 

During  the  past  few  decades  the  progress  of  consolidation  has 
overleaped  national  boundaries  and   we  are  now   well  within 


\  147]         Combination  and  Efficiency  345 

he  period  of  international  industrial  and  mercantile  combina- 
ions.  Owing,  however,  to  the  obvious  limitations  of  the 
ituation,  international  consolidations  are  still  in  the  earlier 
itages  of  development  and  have  assumed  the  forms  primarily 
)f  price  agreements  and  of  pools.  These  international  pools 
ire  found  not  only  in  the  various  branches  of  industry  but  also 
md  more  especially  in  the  shipping  business. 

147.   Coinbiiiation  and  Efficiency 

Combination  of  capital,  as  is  obvious  from  the  illustrations 
jf  the  last  section,  has  made  itself  manifest  in  four  business 
groups:  (i)  the  railroads;  (2)  the  franchise  or  public-service 
enterprises,  including  the  telegraph,  the  telephone  and  the 
so-called  municipal  monopolies  like  water,  gas  and  electric 
light,  street-railway,  heating  and  conduit  companies;  (3)  the 
itrust  companies  in  the  narrower  sense,  the  banks  and  the  insur- 
imce  companies;  (4)  the  industrial  combinations.  The  first 
three  groups  are  so  important  in  themselves  and  so  clearly 
marked  off  from  the  others  that  they  will  be  more  appropri- 
ately discussed  hereafter.  We  shall  confine  our  attention  here 
to  the  industrial  combinations. 

The  advantages  of  such  combinations  from  the  point  of  view 
of  the  producer  are  obvious.  Considerable  savings  are  possible 
through  the  ability  to  buy  cheaply  in  large  quantities.  The 
avoidance  of  cross  freights  by  locating  the  establishments  at 
diflferent  places  is  often  important,  especially  in  the  case  of 
heavy  or  bulky  articles.  The  possibility  of  handling  large 
orders  by  concentrating  production  at  certain  points  has  fre- 

I'quently  turned  the  scale.  The  ability  to  sell  in  considerable 
quantities,  and  therefore  at  a  smaller  percentage  of  profit,  is 
an    added    advantage.     Great    combinations    moreover    afford 

'  opportunities  for  experiments  on  a  large  scale  which  are  difll- 
cult  for  the  small  producers.  Decided  savings  are  possible  in 
reducing  advertising  and  in  dispensing  with   traveling  agents 

■I  or  salesmen  to  procure  business.     Where  the  combination  is  a 

I 


34^  Enterprise  [§  147 

large  one  dealing  wilh  various  branches  of  production,  the 
ability  to  utilize  waste  is  a  pronounced  advantage.  The  benefits 
of  division  of  labor  and  large-scale  production  may  be  multiplied 
by  concentrating  departments  and  facihtating  standardization 
by  devoting  each  factory  or  mill  to  one  particular  product. 
The  larger  the  concentration,  the  better  are  Ukely  to  be  the 
knowledge  and  control  of  credit  relations,  so  as  to  reduce  the 
loss  from  bad  debts.  Again,  more  ample  means  are  afforded 
to  secure  capacity  of  the  highest  order  in  the  management  of 
the  enterprise.  Finally,  the  wider  view  which  comes  from  an 
interchange  of  ideas  and  a  comparison  of  experimental  methods 
in  the  separate  plants  is  frequently  of  value.  The  president 
of  the  American  Tobacco  Company  a  few  years  ago  declared, 
this  to  be  the  chief  benefit  of  combination. 

The  advantages  to  which  we  allude,  however,  must  be  dis- 
tinctly understood  to  mean  the  advantages  of  production 
As  to  how  far  the  benefits  of  combination  are  passed  over  to  th( 
consuming  public  in  general  is  a  different  problem,  to  be  taker 
up  later  (§  239).  What  we  are  considering  here  is  the  relatioi 
of  combination  to  efficiency  of  production. 

We  must  be  careful,  moreover,  not  to  push  the  doctrine  intc 
the  ground.  There  are  limits  to  the  advantages  of  great  size 
The  Germans  have  a  proverb  that  the  trees  do  not  grow  int( 
the  sky;  so  in  industry;  when  a  certain  point  has  been  reachet  1 
the  added  efficiency  of  more  units  becomes  subject  to  the  lav  1 
of  diminishing  returns.  It  has  been  seriously  questioned  b; 
careful  railway  operators  whether  this  limit  of  efficiency  ha 
not  been  overstepped,  or  at  least  approached,  when  we  hav 
separate  units  of  twenty  or  thirty  thousand  miles  in  length 
Even  with  perfect  organization  in  industry,  fundamental  prob 
lems  of  policy  bear  some  relation  to  the  amount  of  details;  ani 
when  the  size  of  the  organization  passes  a  certain  point  - 
which  of  course  differs  in  every  case  — •  the  machinery  of  cor 
trol  tends  to  become  unwieldy  and  cumbrous.  All  this  is  t 
say  that  at  a  certain  point  of  growth  the  new  efficiency  is  cor 
verted  into  irefficie''!rv. 


147]  Growth  of  Combination  347 

The  concentration  of  production,  however,  is  so  general  and 
/orld-wide  a  tendency  that  the  increased  efficiency  of  production 
i  a  quite  sufficient  explanation  of  its  existence.  That  there  are 
ther  contributing  causes  is  more  than  probable,  as  we  shall 
ee  more  fully  hereafter  (§  238);  but  that  these  other  causes 
uflice  to  explain  the  facts  of  combination  is  unlikely.  The  ex- 
lianation  of  a  world-wide  movement  must  in  itself  be  general 
nd  such  a  general  explanation  is  clearly  the  economy  of  con- 
cntrated  production.  It  is  only  in  recent  years  that  industrial 
apital  has  become  so  abundant  as  to  disclose  the  real  advantages 
if  concentration. 

According  to  the  census  of  1900  there  were  185  combina- 
ions,  representing  2,040  plants  and  turning  out  products  to 
he  value  of  $1,667,350,000  a  little  over  14  per  cent  of  the 
otal  industrial  output  of  the  United  States.  But  since  1900 
he  movement  has  progressed  rapidly.  In  1900  there  were  16 
ombinations  each  with  a  capital  of  over  $50,000,000  and  with 

m  aggregate  capital  of  $1,231,000,000.  In  1909,  as  appears 
rom  the  table  on  page  348,  not  only  were  there  30  such  combina- 
ions  with  an  aggregate  capital  three  times  as  great  ($4,020,000,- 

)oo),  but  a  single  combination  now  had  a  larger  capital  than 
he   16  combinations,   and  about  one-half  as  large  as  all  the 
85  combinations  in  1900. 
The  United  States  Steel  Corporation  is  such  a  striking  ex- 

imple  not  only  of   the   consolidation,   but   of   the  integration 
'  )f  production,   that  the  following  figures  are  appended.     The 

issets  of  this  corporation  in  1902  were,  according  to  the  testi- 

nony  of  its  president  in  a  recent  lawsuit,^   as  follows: 

T       Iron  and  Bessemer  ore  properties $700,000,000 

"B       Plants,  mills,  machinery,  etc 300,000,000 

Coal  and  coke  fields 100,000,000 

Railroads,  ships,  etc 80,000,000 

Blast  furnaces 48,000,000 

Natural  gas  fields      20,000,000 

lj        Limestone  properties 4,000,000 

)\        Cash  and  cash  assets 148,281,000 

$1,400,281,000 
'  Hodge  el  al.  vs.  U.  S.  Steel  Corporation. 


348 


Enterprise 


§147 


By  1908,  the  assets  had  grown  to  1,746  millions  and  on  Dec.  31, 
1918  to  1,871  millions.  Contrasted  with  this  integration  of 
unlike  industries,  we  have  the  consolidation  of  like  industries 
shown    below.     The    ten    (in    1918    twenty)    subsidiary    corn- 


Name. 


United  States  Steel  Corporation  .  . 
American  Tobacco  Company  .  .  . 
American  Smelting  &  Refining  Co. 
International  Mercantile  Marine  Co. 

Amalgamated  Copper  Co 

International  Harvester  Co.      .    .    . 

Central  Leather  Co 

Lackawanna  Steel  Co 

Pullman  Co 

Standard  Oil  Co 

United  States  Rubber  Co 

Mackay  Companies    . 

American  Sugar  Refining  Co.  .  .  . 
Corn  Products  Refining  Co.     .    .    . 

American  Can  Co 

Colorado  Fuel  and  Iron  Co.     .    .    . 

Pittsburgh  Coal  Co 

Westinghouse  Electric  Co 

American  Woolen  Co 

Swift  &  Co 

Commonwealth  Edison  Co.  ... 
American  Car  &  Foundry  Co.  .  . 
Virginia-Carolina  Chemical  Co.  .  . 
Republic  Iron  and  Steel  Co.  .  .  . 
Distillers  Securities  Corporation  .  . 
Dupont  de  Nemours  Powder  Co.    . 

International  Paper  Co 

National  Biscuit  Co 

American  Locomotive  Co 

United  Copper  Co 


Founded 

Outstanding 

or  Reor- 

Stock and 

ganized. 

Bonds,  igog. 

I901 

$i>393.i  72,000 

1904 

230,569,500 

1905 

177,000,000 

1902 

175,961,200 

1899 

153,880,000 

1902 

120,000,000 

1905 

108,328,002 

1892 

103,901,400 

1867 

100,000,000 

1899 

98,338,300 

1892 

92,198,000 

1903 

91,380,400 

1891 

90,000,000 

1906 

87,118,100 

1901 

82,466,000 

1903 

79>325,Soo 

1899 

78,880,400 

1902 

73,504,477 

1899 

70,501,100 

1885 

65,000,000 

1907 

60,483,000 

1899 

60,000,000 

1895 

57,984,400 

1899 

57,876,900 

1906 

57,709,941 

1903 

57,281,966 

1898 

54,770,000 

1898 

54,040,500 

190I 

53,000,000 

1902 

50,000,000 

panies  (the  Carnegie,  the  Illinois,  and  the  Lorain  Steel  Com 
panics,  the  American  Steel  and  Wire  Company,  the  Nationa 
and  the  Shelby  Steel  Tube  Companies,   the  American  Shee  |l 
Steel,  American  Tin  Plate,  American  Bridge  and  Union  Stee 
Companies),    themselves    the    results   of    many   consolidations 


^  148]  Limits  of  Combination  340 

-epresented  in  1903  86  blast  furnaces,  31  Bessemer  and  open- 
:!oarth  steel  works,  57  blooming,  slabbing,  billet  and  sheet 
.^ar  mills,  20  rail  and  plate  mills,  251  puddling  furnaces,  39 
ikelp  mills,  59  bar,  hoop  and  cotton  tie  mills,  11  structural 
jhape  works,  24  rod  mills,  22  wire  mills,  447  sheet,  black  plate 
ind  tin  plate  mills,  5  tube  mills,  26  bridge  and  structural  plants, 
24  foundries  and  16  miscellaneous  works. 

148.   Limits  of  Combination 

It  is  clear  that  if  there  were  no  limit  to  combination  the 
ogical  result  in  every  industry  would  be  a  monopoly  of  produc- 
ion.  As  a  matter  of  fact,  however,  there  are  two  classes  of 
imits,  artificial  and  natural. 

The  artificial  limits  are  those  due  to  the  interference  of  gov- 
;rnment.  The  entire  problem  of  legislative  restrictions  on 
;ombinations  will  be  discussed  hereafter  (chapter  xxxvi). 
scarcely  less  important,  however,  are  the  natural  limits  of  com- 
)ination.  Comparatively  slight  significance  indeed  is  to  be  at- 
ached  to  the  point  discussed  in  the  last  paragraph,  namely,  the 
liminution  of  efficiency  and  economy  after  the  reaching  of  a  cer- 
ain  point.  For  under  certain  conditions  the  industry  may  have 
ittained  a  monopoly  long  before  this  limit  has  been  reached. 
The  far  more  effective  limit  of  combination  is  the  persistence 
)f  competition.  In  certain  branches  this  limit  does  not  exist, 
lud  ought  not  to  exist.     In  the  railroad  business  the  objection 

0  competition  is  that  it  leads  to  discrimination.  In  the  other 
:>ubhc-service  corporations  competition  might  do  more  harm 
han  good.  Competing  telephones  would  be  a  source  of  lasting 
:onfusion  to  the  patrons,  competing  gas  and  water  companies 

1  continual  annoyance  to  the  users  of  the  streets.  In  some 
)ther  branches  of  industry,  monopolistic  combination  is  un- 
Icsirable  but  none  the  less  possible.  Where  the  industry  is 
oncerned  with,  or  based  upon,  masses  of  raw  material  found 
n  a  state  of  nature  but  in  limited  quantities  and  in  specially 
avored  locations,  the  control  of  the  natural  monopoly  is  apt  to 


350  Enterprise  [§  148 

lead  to  a  monopolistic  combination  of  the  business.     In  ordinary 
business,   however,   where   the   raw   material  is  itself  either  a 
manufactured  product  or  procurable  under  competitive  condi- 
tions, the  natural  limits  to  combination  are  more  obvious.     Ir 
the   absence   of   legal   or   natural   monopoly,   whenever  profits 
are  high  enough  to  tempt  competition,  new-comers  are  likelj 
to  appear.     The  combination  may  swallow  up  the  new  com- 
petitor, but  as  long  as  science  remains  free,  as  long  as  unfaii 
competition  (§  238)  is  prevented  and  as  long  as  the  combinatior 
does  not  control  the  government  or  the  general  media  of  trans 
portation,  the  process  will  repeat  itself.     The  so-called  "eco 
nomic  wastes"  of  competition  are  a  cheap  price  to  pay  for  it 
many  advantages.     Thus,  while  the  United  States  Steel  Cor 
poration  is  constantly  expanding,  new  competing  corporation 
have  been  growing  equally  fast  or  even  faster.     Instead  of  ; 
single   combination,   we  have  in  each  branch   the  looser  con 
centration  known  as  the  pool,  which  has  to  be  readjusted  when 
ever  a  new  competitor  appears.     At   the  close  of   1904,  afte 
the  Lackawanna  Steel  Corporation  decided  to  make  steel  va'Ai 
the   percentages   of   the   Steel   Rail   Association   were   at   one 
changed,    and   the   arbitrator   apportioned    the   output   amon 
the  five  members,  —  the  United  States,  the  Lackawanna,  th 
Pennsylvania,  the  Cambria  and  the  Maryland  Steel  companie; 
So  in  another  domain  of  business,  like  the  great  departmer 
stores  in  our  cities,  there  is  no  way  of  keeping  out  not  only  th 
large  competitors,  but  the  small  competitors  as  well.     Indee 
the   erection   of    these   mammoth   stores   has    not    appreciabl 
diminished  the  number  of  little  shops. 

Again,  there  are  whole  fields  of  industry  where  combinatic 
is  only  slightly  applicable.  In  the  woollen  trades,  in  the  she 
factories,  in  the  cotton  and  silk  mills,  as  well  as  in  numberle 
other  industries,  the  combinations  are  apt  to  be  short-lived  ( 
partial.  Finally,  in  the  immense  domain  of  agricultural  pr 
duction  the  possibility  of  combination  is  almost  entire 
eliminated. 


j  i48i  Limits  of  Combination  351 

It  is  clear  therefore  that  combination  must  not  be  confused 
with  monopoly  and  that  every  combination  is  not  necessarily 
1)11  the  highroad  to  monopoly.  With  the  methods  designed  to 
[)revent  monopoly  we  shall  deal  later  (§  241).  What  we  desire 
lo  emphasize  here  is  the  truth  that  if  factitious  advantages  are 
removed  and  no  favors  or  unfair  practices  are  permitted,  we 
ncfd  have  no  fear  about  the  growth  of  combination.  For  with 
a  free  and  a  fair  field,  the  natural  limits  of  combination  will  dis- 
t  lose  themselves,  and  up  to  these  limits  combination  will  mani- 
fest all  those  advantages  of  concentrated  production  to  which 
rtltention  has  in  this  chapter  been  directed. 


Book  III 
Value  and  Distribution 


CHAPTER  XXIII 
PROFITS 

149.  References 


J.  B.  Clark,  Distribution  (1899),  ch.  xiii;  N.  G.  Pierson,  Principles 
(1902),  part  I,  ch.  v;  F.  W.  Taussig,  Principles  (1911),  chs.  xlviii-1: 
A.  T.  Hadley,  Economics  (1896),  chs.  iv,  ix;  A.  Marshall,  Principles 
(1910),  bk.  vi,  chs.  vi,  vii;  T.  N.  Carver,  Distribution  (1904),  ch.  vii; 
F.  A.  Fetter,  Principles  (1915),  part  5;  J.  S.  Nicholson,  Principles 
(1893-1901),  bk.  ii,  ch.  xiii,  and  bk.  iv,  ch.  vi;  A.  W.  Flux,  Principles 
(1904),  ch.  x;  Veblen,  Theory  of  Business  Enterprise  (1904),  chs.  vi,  x; 
H.  R.  Seager,  Principles  (1913),  chs.  xii,  xiii;  F.  B.  Hawley,  Enterprise 
and  the  Productive  Process  (1907);  H.  C.  Emery,  Speculation  in  the  Stock 
and  Produce  Exchange  of  the  United  States  (1896);  E.  G.  Nourse,  The 
Chicago  Produce  Market  (1918);  W.  Parker,  The  Paris  Bourse  and  French 
Finance  (Columbia  Studies,  1920) ;  H.  Withers,  Stocks  and  Shares  (4  imp., 
1917);  A.  C.  Stevens,  Futures  in  the  Wheat  Market  (Quarterly  Journal  of 
Economics,  II,  1888),  and  The  Utility  of  Speculation  (Political  Science 
Quarterly,  VII,  1892);  S.  J.  Chapman  and  D.  Knoop,  Anticipations  in 
the  Cotton  Market  (Econ.  Jour.,  XIV,  1904);  R.  Giffen,  Stock  Exchange 
Securities  (1877);  A.  Crump,  Theory  of  Stock  Exchange  Speculation  (2d 
ed.,  1874) ;  Report  of  the  Commissioner  of  Corporations  on  Cotton  Exchanges 
(3  vols.,  1908-1909);  H.  H.  Brace,  The  Value  of  Organized  Speculation 
(1913) ;  H.  B.  Drury,  Scientific  Management  (1918) :  R.  F.  Hoxie,  Scientific 
Management  and  Labor  (191 5). 

150.  The  Shares  in  Distribution 

All  wealth  that  is  created  in  society  finds  its  way  to  the 
final  disposition  of  the  individual  through  certain  channels  or 
sources   of    income.      This    process   is   called    distribution,    and 

352 


§  150]  scares  in  Distribution  353 

tlic   sliarcs   in   dislribulioii    differ   not    only  in    uniounl    bill    in 
kind. 

Distribution,  like  production,  is  a  social  phenomenon.  If 
every  one  consumed  what  he  individually  produced,  there  would 
be  no  exchange,  no  price,  no  distribution.  In  production  we 
study  the  creation  of  the  social  income;  in  distribution  we 
study  its  division.  In  the  one  case  we  regard  it  as  the  na- 
tional output,  in  the  other  as  the  national  dividend.  In  pro- 
duction w^e  deal  with  the  cost  or  expense  of  the  factors  which 
co-operate  to  create  wealth;  in  distribution  we  deal  with  their 
remuneration.  It  is  clear  that  the  shares  in  distribution  differ 
according  to  the  character  of  production  and  the  structure  of 
economic  life.  Where,  for  instance,  slavery  exists,  we  cannot 
speak  of  wages;  where  the  same  individuals  own  the  capital 
and  do  the  manual  work,  we  cannot  well  distinguish  between 
profits  and  wages;  where  capital  is  not  loaned,  interest  does 
not  emerge.  The  modern  science  of  economics  is,  as  we  have 
learned,  due  to  the  efforts  to  analyze  the  modern  shares  in 
distribution. 

The  study  of  distribution  is  primarily  a  study  of  the  remu- 
neration of  the  factors  of  production.  Since  each  factor  con- 
tributes to  the  common  result  known  as  the  social  income, 
there  must  be  a  certain  part  of  the  product  traceable  to  each 
factor.  There  are  hence  as  many  shares  in  distribution  as 
there  are  factors  in  production.  The  remuneration  of  labor  is 
called  wages.  The  remuneration  of  the  fund  of  capital  is 
called  interest.  The  remuneration  of  the  concrete  things 
that  possess  a  capital  value  is  caUed  rent.  Rent  is  usually 
limited  to  the  return  from  land;  but  since  other  things  as  well 
as  land  are  rented,  it  is  better,  as  we  shall  see,  to  call  the  re- 
muneration of  land  land-rent  or  ground-rent  in  contradis- 
tinction to  other  rents.  Finally,  the  remuneration  of  the 
entrepreneur,  or  the  man  who  carries  on  the  enterprise,  is 
called  profits.  Among  them,  wages,  interest  or  rent,  and 
profits  exhaust  the  entire  social  income. 
23 


354  Profits  .         [§151 

In  modern  society  differentiation  of  function  has  proceeded 
to  the  extent  that  different  classes  control  different  agents  of 
production.  This  separation,  however,  is  not  rigid.  The  same 
man  may  own  land  and  factories;  he  may  be  a  workman  and  a 
stockholder  in  the  same  plant,  as  in  the  United  States  Steel 
Corporation;  he  may  be  a  farm-laborer  and  a  tenant  or  a  land- 
owner; he  may  be  a  money-lender  and  yet  actively  engaged 
in  industry,  commerce  or  agriculture.  In  the  great  mass  of 
cases,  however,  the  social  class  corresponds  to  a  distinct  kind 
of  income,  and  in  its  broadest  aspect  the  social  shares  in  dis- 
tribution correspond  to  the  factors  of  production. 

151.    Ordinary  Profits 

Profits  are  the  income  from  business  enterprise.  They  are 
not  necessarily  limited  to  capital.  An  employment  agency  or 
an  Italian  padrone  may  make  profits  from  directing  labor  into 
the  right  channel.  A  real-estate  operator  may  make  profits 
out  of  selling  land.  Profits  are  a  result  of  business  enterprise, 
and  the  entrepreneur  may  deal  in  labor,  in  land,  in  capital  or 
in  all  three.  It  is  hence  inexact  to  speak  only  of  the  profits 
of  capital. 

The  best  method  of  gaining  an  insight  into  the  nature  of 
profits  is  to  consider,  first,  ordinary  profits.  By  ordinary  profits 
are  meant  the  profits  of  a  regular  business  that  deals  in  a  repe- 
tition of  analogous  transactions  in  competition  with  others. 
The  term  normal  profits  that  is  sometimes  employed  is  less 
satisfactory,  because  it  incorrectly  implies  that  there  is  such 
a  thing  as  a  normal  or  general  rate  of  profits,  as  well  as  because 
it  brings  to  mind  the  conception  of  normal  value;  whereas 
profits  are  a  result  of  fluctuations  in  market  value  and  would 
not  exist  in  a  state  of  normal  equilibrium. 

Profits  are  always  a  surplus.  They  are  the  difference  between 
the  cost  of  production  or  acquisition  and  the  selling  price. 
They  form  a  differential,  however,  in  a  second  sense.  Profits 
are  the  surplus  of  the  intramarginal    over  the   marginal  pro- 


§  i5i]  Ordinary  Profits  355 

ducer.  At  any  given  time,  under  competitive  conditions, 
market  price  is  the  same  (p.  235),  but  cost  varies.  The  ex- 
penses of  production  are  manifold,  but  may  ordinarily  be 
classified  into  cost  of  raw  material,  wages,  rent,  interest  on 
the  capital  borrowed  or  invested,  taxes  and  miscellaneous  out- 
lays like  insurance,  advertisements  and  transportation  expenses. 
All  of  these  obviously  vary  from  individual  to  individual.  Some 
will  display  more  care  in  the  selection  and  arrangement  of 
their  labor  force;  some  will  choose  a  more  advantageous  situa- 
tion, with  a  saving  in  both  rent  and  transportation;  some  will 
accomplish  better  results  with  less  capital  and  economize  in 
interest  as  well  as  taxes;  some  will  exercise  more  ingenuity  in 
purchasing  the  raw  material  or  securing  a  market.  At  the 
bottom  of  the  scale  is  the  marginal  producer,  working  under 
the  least  favorable  circumstances,  and  who  can  nevertheless  get 
no  more  for  his  goods.  With  him  price  equals  cost;  with  the 
others  price  exceeds  cost.  The  excess  of  price  over  cost  con- 
stitutes profits. 

It  is  evident  that  in  the  long  run  profits  could  not  exist  in  a 
state  of  normal  equilibrium.  If  there  were  no  change  in  the 
general  conditions  affecting  value  —  if,  in  other  words,  economic 
forces  were  in  equilibrium  and  society  quiescent  in  all  respects 
save  the  existence  of  such  a  complete  mobility,  of  capital  and 
labor  as  is  implied  in  the  idea  of  frictionless  competition,  — 
there  could  be  no  permanent  profit  to  any  producer.  The 
gross  earnings  or  gross  profits  would  indeed  include  interest  on 
capital  invested;  for  if  the  business  man  did  not  earn  interest 
on  his  capital,  he  would  go  out  of  business  and  loan  his  capital 
at  the  normal  rate  to  some  one  else.  So  also  the  gross  earnings 
would  suffice  to  give  him  a  bare  compensation  for  his  services, 
for  if  not  he  would  enter  some  other  employment  or  become  a 
wage-earner.  Gross  profits  must  include  interest  and  wages. 
But  there  would  be  no  net  profits,  or  surplus  profits,  or  profits 
in  the  real  sense  of  the  word.  For  as  soon  as  a  profit  appeared 
the   entrepreneurs   in    other    fields    who   were   just    making   ex- 


356  Profits  [§151 

penses  would  at  once  bid  against  each  other  in  their  effort  to 
secure  capital  and  labor,  until  they  would  capture  their  share 
of  the  market,  and  the  profits  would  dissipate  themselves  on 
the  one  hand  in  the  higher  rate  paid  for  the  factors  of  pro- 
duction, and  on  the  other  hand  in  the  lower  price  of  the  product 
due  to  the  greater  supply.  What  was  added  in  one  industry 
would  be  subtracted  from  another.  In  actual  life,  however, 
there  is  a  continual  change,  —  population  varies,  wants  are 
modified,  capital  increases,  the  processes  of  industry  and 
methods  of  enterprise  alter.  Competitive  profits  are  due  wholly 
to  such  changes.  He  who  can  take  advantage  of  the  market 
secures  the  gain. 

Profits,  again  are  necessarily  unstable.  They  last  only  as 
long  as  the  economic  fluctuation  or  variation  from  the  normal 
condition  continues.  A  new  invention  is  the  source  of  profit 
because  it  reduces  cost;  but  when  the  patent  expires  and 
competition  sets  in,  the  influx  of  new  producers  will  reduce 
the  price  to  the  new  cost  level  and  the  profit  will  disappear. 
The  profits  may  accrue  for  a  time  to  individual  producers  or 
to  the  whole  class  of  producers.  When  general  demand  aug- 
ments or,  as  in  common  parlance,  when  times  are  good  and 
sales  brisk,  every  one  may  make  money.  The  increased 
profits,  however,  will  lead  to  greater  production,  and  the  rela- 
tion between  consumption  and  production  will  soon  change, 
so  as  to  usher  in  the  "bad  times"  and  a  disappearance  of 
profits.  This  rhythmic  succession  of  inflation  and  depression 
will,  be  studied  later.  Here  it  is  desired  to  call  attention  to 
the  fact  that  profits  can  last  only  as  long  as  the  economic  dis- 
harmony or  perturbation  lasts,  that  is,  as  long  as  the  forces  are 
not  in  equilibrium.  If  the  manufacturer  continually  introduces 
new  inventions,  he  may  retain  his  superiority  over  his  compet- 
itors. If  the  demand  of  the  community  grows  by  leaps  and 
bounds,  it  may  keep  ahead  of  the  new  production  and  for  a 
long  period  afford  profits  to  all  producers.  This  may  be  true 
of  a  particular  commodity  or  of  a  whole  group  of  enterprises. 


§  i5i]  Ordinary  Profits  357 

At  one  period  in  the  United  States  the  shipping  trade  was 
particularly  remunerative,  at  another  the  railroad  industry,  and 
so  on.  In  a  new  section  the  supply  of  capital  and  labor  may 
be  so  scarce  that  all  business  is  lucrative;  and  the  increase  in 
population  may  cause  agricultural  profits  to  grow  and  land 
values  hence  to  rise.  In  an  old  country  the  general  political 
and  commercial  relations  may  be  such  as  to  afford  a  growing 
foreign  market,  with  the  possibility  of  large  and  long-continued 
profits  to  the  domestic  producer.  In  every  case,  however,  as 
soon  as  the  original  force  has  spent  itself  and  competition  has 
set  in,  the  profit  tends  to  vanish. 

In  this  sense,  and  in  this  sense  only,  is  it  true  that  profits 
tend  either  to  an  equality  or  to  a  minimum.  The  older  writers 
confused  interest  with  profit.  Interest  is  the  return  from  the 
fund  of  capital;  profits  are  the  return  from  the  conduct  of 
business  enterprise,  irrespective  of  whether  the  enterprise  deals 
with  capital  or  labor  or  both.  Interest  is  a  part  of  cost; 
profit  is  a  surplus  above  cost.  Interest,  as  we  shall  see,  has  a 
normal  rate;  profits  may  have  an  average  rate  but  no  normal 
rate.  The  marginal  producer  earns  no  profits;  the  intra- 
marginal  producers  make  profits  which  vary  with  the  discrep- 
ancy of  their  cost  from  the  market  price.  If  in  any  businesses 
indeed  profits  are  particularly  high,  the  more  efiicient  pro- 
ducers in  other  lines  will  transfer  their  capital  to  these  occupa- 
tions; but  in  these  occupations,  as  in  the  others,  the  competitive 
profits  will  range  from  zero  to  large  figures.  If  there  is  any 
equality,  it  is  an  equality  of  an  average  between  much  and 
nothing.  On  the  other  hand,  while  the  tendency  to  an  equal- 
ity is  true  of  average  profits  —  which  is  of  importance  only  as 
between  occupations  —  the  tendency  of  profits  to  a  minimum 
is  true  of  each  particular  occupation.  There  is  under  normal 
conditions  of  progress  a  tendency  in  the  rate  of  interest  to  fall, 
but,  as  we  shall  see,  never  to  vanish;  there  is  under  competi- 
tive conditions  always  a  tendency  for  the  rate  of  profits  in 
each  individual  business  to  disappear. 


358 


Profits  [§  152 


Thus  in  ordinary  enterprises  profit  is  the  great  lure  of 
energy,  and  competition  the  great  destroyer  of  profit.  Com- 
petitive profits,  the  union  of  both,  are  hence  the  symptom  of 
progress.  They  can  exist  only  by  being  continually  renewed; 
they  are  not  a  tax  on  the  community,  but  a  draft  on  nature. 
Profits  are  a  result  of  price,  not  a  cause  of  price.  Production 
at  a  lower  cost  creates  profits;  competition  forces  price  down 
to  lower  cost  and  eliminates  profits.  Profits  can  be  main- 
tained only  by  the  creation  of  a  continually  newer  cost  level 
lower  than  the  new  price. 

152.   Aleatory  Profits 

Profits  are  sometimes  described  as  the  wages  of  superin- 
tendence. There  are  indeed  certain  occupations  where  the 
income  partakes  of  the  nature  of  wages.  The  commissions  of 
a  broker,  like  the  fees  of  a  professional  man,  are  really  wages, 
even  though  they  are  popularly  called  profits.  Wages,  how- 
ever, differ  from  profits  in  that  wages  are  a  stipulated  income 
and  profits  a  residual  income.  There  is  a  normal  rate  of 
wages,  there  is  no  normal  rate  of  profits.  Wages  are  a  part  of 
cost,  profits  a  surplus  over  cost.  The  entrepreneur  may  think 
that  he  deserves  a  return  for  his  services,  but  whether  he 
secures  one  depends  on  his  competitors.  There  is  always  a 
certain  level  below  which  wages  cannot  fall,  because  no  work 
would  otherwise  be  done;  but  the  very  continuance  of  com- 
petitive profits  depends  on  the  abler  producer  cutting  down 
cost  to  the  point  where  the  marginal  producer  earns  no  profits. 
The  reduction  of  some  wages  to  zero  implies  the  starvation  of. 
the  laborer  and  the  crippling  of  the  productive  force  of  the 
community;  the  reduction  of  some  profits  to  zero  means  the 
elimination  of  the  inefficient  and  the  continuance  of  progress. 
Above  all,  profits  differ  from  wages  in  that  profits  are  the  direct 
result  of  price  fluctuations.  The  question  thus  arises  as  to  the 
dependence  of  profits  upon  chance. 

Aleatory  or  chance  profits  exist   in  varying  degree.     Some 


§  152]  Aleatory  Profits  359 

are  essentially  unique  or  sporadic.  If  I  iind  a  pocket-book  on 
the  street  or  receive  a  bequest,  the  income  is  wholly  aleatory. 
The  law  of  chance  governing  all  such  pure  windfalls  may  be 
of  interest  to  the  mathematician,  but  is  of  little  importance 
to  the  economist.  The  line  between  aleatory  and  ordinary 
profits  is,  however,  not  so  easy  to  draw.  In  the  first  place,  we 
have  the  great  field  of  speculative  profits,  to  be  discussed  in  a 
moment.  Secondly,  there  is  an  element  of  luck  in  all  business. 
The  oscillations  of  demand  and  supply  are  infrequently  influ- 
enced by  accident.  A  flood,  an  invention,  a  war,  a  new  whim 
in  fashion,  a  chance  occurrence  of  any  kind,  may  affect  the 
individual  or  the  group,  the  producer  or  the  consumer,  and  by 
influencing  either  cost  or  price  modify  business  profits.  In 
one  sense  all  price  fluctuations  are  accidental. 

A  distinction  is  sometimes  drawn  between  industrial  and 
pecuniary  profits.  By  industrial^  profits  in  the  broad  sense  are 
meant  profits  derived  from  the  production  and  sale  of  repro- 
ducible goods,  such  as  compose  the  great  mass  of  the  annual 
output  of  wealth.  "Industrial"  in  this  sense  would  include 
agricultural  and  commercial  profits.  Pecuniary  profits,  on  the 
other  hand,  comprise  the  results  of  such  transactions  as  have 
to  deal  only  secondarily  with  production  and  primarily  with 
sale,  not  from  producer  to  consumer,  but  from  one  owner  to 
another.  The  chief  example  of  such  pecuniary  profits  nowa- 
days is  the  dealing  in  vast  masses  of  vendible  capital,  irrespec- 
tive of  its  industrial  uses.  Many  of  the  large  fortunes  of 
recent  times  have  been  derived  from  such  sporadic  or  fortui- 
tous profits.  When  financiers  trade  in  railway  securities  or 
"industrial"  stocks,  their  profits  on  each  isolated  transaction 
may  be  independent  of,  or  even  opposed  to,  the  best  manage- 
ment of  the  corporation  as  reflected  in  higher  quotations;  for 
their  profits  may  come  from  buying  at  lower,  rather  than  sell- 
ing at  higher,  prices.  But  even  here,  with  all  the  abuses  of 
which  the  practices  are  susceptible,  the  permanence  of  pecu- 
niary profits  as  a  whole  is  ultimately  connected  with  industrial 


360  Profits  [§  15;, 

progress.  If  stocks  go  down,  the  profits  of  some  must  Ije 
counterbalanced  by  the  losses  of  others;  but  if  stocks  go  up, 
every  one  may  participate  in  the  gain,  and  even  if  there  are 
some  losses  they  may  be  more  than  compensated  by  the  profits 
of  others.  Stocks,  however,  can  rise  permanently  only  if  the 
enterprise  earns  more,  that  is,  if  it  is  industrially  more  efficient. 
Thus,  while  pecuniary  profits  may  in  individual  cases  be  the 
result  of  a  change  in  ownership,  with  no  assignable  relation  to 
the  production  or  utilization  of  the  commodities  which  the 
securities  represent,  pecuniary  profits  as  a  whole  have,  in  last 
instance,  a  real  connection  with  the  industrial  profits  on  which 
they  finally  rest. 

Chance  or  luck,  therefore,  may  often  be  the  cause  of  sporadic 
profits,  but  cannot  explain  their  persistence  either  for  the  in- 
dividual or  for  society.  The  individual  who  attempts  to  secure 
pecuniary  profits  can  in  the  long  run  succeed  only  if  he  uses 
good  judgment,  foresight  and  practical  sagacity,  thus  elimi- 
nating more  and  more  the  influence  of  blind  chance.  The 
financier,  like  the  manufacturer  or  merchant,  is  really  a  servant 
of  society;  like  some  servants,  he  may  be  refractory,  unfaith- 
ful or  treacherous,' but  in  the  main  he  will  fare  best  when  he 
best  subserves  the  interests  of  society.  The  aleatory  element 
is  inseparable  from  profits,  since  profits  are  derived  from 
fluctuations;  but  the  ultimate  cause  of  persistent  profits  is  the 
ability  of  tlie  individual  to  take  advantage  of  the  fluctuation,  — 
and  in  the  long  run  this  ability  plays  into  the  hands  of  society 

at  large. 

153.    Speculative  Profits  —  Nature 

By  speculation  is  meant  the  purchase  or  sale  of  an3^thing  in 
the  hope  of  profit  from  an  anticipated  change  in  its  price.  It 
differs  from  ordinary  trade  only  in  degree,  for  all  profit,  as  we 
have  seen,  has  an  aleatory  element.  The  difference,  however, 
consists  in  the  fact  that  speculation  concentrates  and  intensi- 
fies the  forces  which  affect  demand  and  supply. 

Speculation   was  in  former   times  chiefly  place  speculation. 


§  153]  speculative  Profits  361 

The  practice  of  buying  in  one  market  and  selling  at  almost 
the  same  time  in  another  has  been  lessened  by  the  modern 
means  of  transportation  and  communication,  whereby  price 
fluctuations  between  places  have  been  minimized.  It  exists 
to-day  chiefly  in  the  form  of  "arbitrage"  of  stock  or  com- 
mission brokers,  and  its  success  depends  on  the  rapidity  with 
which  their  telegraphic  facilities  may  enable  them  to  anticipate 
the  pubhshed  quotations  on  the  exchanges.  The  more  im- 
portant form  at  present  is  time  speculation  based  on  price 
fluctuations  after  the  lapse  of  an  interval  of  time. 

Speculation,  again,  may  be  sporadic  or  regular.  Sporadic 
speculation  is  almost  as  old  as  business  itself.  It  is  the  result 
either  of  a  popular  frenzy  or  of  a  deliberate  scheme  to  take 
advantage  of  a  temporary  occurrence.  An  example  of  the 
first  kind  is  the  tulip  mania  in  seventeenth-century  Holland, 
when  the  most  fabulous  profits  were  made  by  those  who  had 
anticipated  the  short-lived  demand  for  bulbs.  So  also  the 
occasional  speculative  "booms"  in  real  estate  at  present  are 
the  cause  of  enormous  profits,  followed  by  corresponding 
losses  when  the  bubble  is  pricked.  In  such  cases  speculation 
is  due  to  changes  in  demand,  which  it  is  almost  impossible  for 
individuals  to  foresee  or  to  control.  Supply,  on  the  other 
hand,  lends  itself  more  readily  to  manipulation,  and  deliberate 
attempts  are  not  infrequently  made  to  accomplish  this  end. 
From  the  eft'orts  of  Joseph  to  buy  up  the  corn  crop  in  Egypt, 
and  from  the  decision  of  the  Greek  philosopher  to  show  his 
practical  wisdom  by  purchasing  in  advance  of  the  vintage  all 
the  winepresses,  down  to  the  modern  pools  and  rings,  attempts 
to  corner  the  market  are  occasionally  found.  While  sometimes 
successful  in  minor  cases,  they  commonly  fail  when  on  a  large 
scale.  The  failure  is  due  (a)  to  the  immensity  of  the  capi- 
tal required,  (b)  to  the  difficulty  of  procuring  and  retaining 
trusty  confederates  whose  selfish  interests  may  often  be  best 
subserved  by  selling  when  their  principal  is  buying,  (c)  to 
the  fact  that  rising  prices  vv'ill  bring  to   the  market  all    the 


362  Profits  [§  153 

reserved  stock,  and  (d)  to  the  danger  of  the  substitution  by 
the  consumer  of  some  cheaper  commodity.  Thus,  while  the 
successful  corner  in  Harlem  stock  in  1863  laid  the  foundation 
of  the  Vanderbilt  fortunes,  the  three  most  picturesque  and 
gigantic  attempts  of  the  last  two  decades  -^  the  Chicago  Leiter 
corner  in  wheat,  the  Paris  Secretan  corner  in  copper  and  the 
New  York  Sully  corner  in  cotton  —  have  all  been  failures, 
resulting  in  the  ruin  of  the  speculators. 

Both  classes  of  sporadic  speculation  are  in  the  end  socially 
disadvantageous,  because  the  speculative  price  is  driven  far 
above  or  below  the  true  value,  with  resulting  losses  in  the 
process  of  restoring  the  equilibrium.  The  inordinately  high 
cotton  prices,  due  to  the  speculative  attempts  of  1904,  well- 
nigh  produced  a  crisis  in  the  cotton  industry  in  England  and 
New  England,  and  while  the  Southern  planters  temporarily 
benefited,  the  high  profits  led  to  such  an  increased  acreage 
during  the  next  season  that  the  price  fell  below  the  cost  of 
production.  A  moderately  remunerative  price  would  have 
been  preferable  to  these  sudden  alternations  of  large  profits 
and  extreme  losses. 

It  would,  however,  be  a  mistake  to  assume  that  all  speculation 
is  of  this  character.  Speculation  could  never  have  become  a 
part  of  the  normal  business  life  of  modern  times  if  it  had  sim- 
ply these  defects  and  anti-social  characteristics.  The  modern 
stock  and  produce  exchanges  have  a  definite  economic  function 
to  perform. 

Speculation  occurs  in  securities  or  commodities.  The  qual- 
ities which  render  a  commodity  peculiarly  fit  for  regular  specu- 
lative dealings  are  three  in  number:  («)  it  must  be  a  staple, 
with  a  large  and  regular  production;  (b)  it  must  be  homo- 
geneous in  quality,  so  that  any  unit  will  be  as  acceptable  as 
another;  (c)  it  must  be  capable  of  ready  definition  and  measure- 
ment. Accordingly  we  find  exchanges  devoted  to  cereals,  like 
W^heat,  rye,  barley,  corn  and  oats,  to  coffee  and  sugar,  to  cotton 
and  tobacco,  to  iron  and  tin.     In  the  case  of  securities  all  those 


§  153]  Speculative  Profits  363 

qualities  are  obviously  present.  The  chief  transactions  on  both 
the  stock  and  produce  exchanges  may  be  summarized  as 
follows: 

If  the  prices  in  the  estimation  of  the  speculator  are  high  but 
tend  downward,  he  will  "sell  short,"  that  is,  engage  to  deliver 
at  a  future  time  goods  not  yet  in  his  possession.  If,  when  the 
time  arrives,  he  can  purchase  at  the  anticipated  lower  price, 
the  difference  constitutes  his  profits.  Or  the  same  result  can 
be  reached  by  a  "covering"  contract,  so  called  because  he 
covers  the  short  sale  by  making  a  purchase  at  a  somewhat 
lower  price  deliverable  at  the  same  time.  On  the  other  hand,  if 
prices  are  low  but  in  his  estimation  tend  upward,  he  will  "buy 
long,"  that  is,  buy  more  than  he  would  care  to  take  at  present; 
and  when  the  goods  are  finally  delivered  he  can  sell  at  a  profit. 
Or,  as  in  the  preceding  case,  he  can  at  once  make  a  "realizing" 
or  "liquidating"  sale  at  a  higher  price,  deliverable  at  the  same 
time.  Because  the  "shorts"  speculate  for  a  fall,  they  arc 
called  bears  (who  pull  down);  while  the  "longs,"  who  specu- 
late for  a  rise,  are  called  bulls  (who  toss  up).  When  a  sub- 
stantial interval  of  time  elapses  between  the  two  parts  of  the 
transaction,  it  is  called  a  "future."  Cotton  futures,  for  in- 
stance, are  dealt  in  months  before  the  transaction  is  closed. 
June  deliveries  may  be  sold  in  January.  Where  the  delivery 
is  to  take  place  at  once,  that  is,  on  the  spot  or  in  the  imme- 
diate future,  we  speak  of  "spot"  cotton  or  wheat. 

On  the  stock  exchange  most  of  the  deliveries  take  place  on 
the  following  day,  although,  as  in  New  York,  the  option  of  deliv- 
ery, is  sometimes  three,  sometimes  thirty  or  sixty  days.  Apart 
from  the  mere  gains  in  daily  speculation  through  "scalping," 
the  profits  on  the  stock  exchange  are  realized  chiefly  through 
loans.  If  the  "short,"  for  instance,  is  not  ready  to  buy  in 
the  stocks  when  delivery  is  due,  he  arranges  to  borrow  them, 
expecting  to  liquidate  his  loan  by  a  future  purchase  at  lower 
prices.  Vice  versa,  the  "long"  purchaser  who  is  not  ready  to 
sell  arranges  with  a  broker  to  "carry"  the  stocks  for  him  until 


364  Profits  [§  154 

such  time  as  he  can  sell  at  a  profit.  The  broker  protects 
himself  against  any  possible  fall  in  price  by  requiring  the  cus- 
tomer to  put  up  a  margin  in  cash,  which  differs  with  the  price 
fluctuations.  In  the  produce  exchange  it  is  the  practice  to 
deposit  with  some  constituted  authority  the  margin  or  sum 
sufficient  to  secure  the  other  party  from  loss  in  case  of  failure 
to  fulfil  the  contract  for  future  delivery.  Such  transactions 
are  therefore  called  speculating  on  a  margin.  In  practice  it  is 
impossible  to  distinguish  between  margin  dealings  where  there 
is  no  delivery  and  those  where  actual  delivery  is  made  or 
contemplated,  since  the  difference  depends  on  the  shifting  in- 
tention of  the  speculator,  and  since  in  every  contract  actual 
delivery  of  the  stock  or  produce  can  legally  be  called  for. 
Finally,  speculation  takes  the  form  of  privileges.  A  "put"  is 
the  privilege  to  put  or  deliver  to  the  other  party  at  a  definite 
time  the  security  or  commodity  at  a  fixed  price.  A  "call"  is 
the  privilege  to  call  or  demand  from  the  other  party  at  a  defi- 
nite time  the  security  or  commodity  at  a  fixed  price.  Puts 
and  calls  may  be  bought  or  sold;  when  a  speculator  acquires 
the  right  of  electing  whether  to  put  or  call  the  stock  the  privilege 
is  called  a  "spread"  or  "straddle."  Prices  of  such  privileges 
depend  on  the  nature  of  the  market,  the  nature  of  the  security, 
the  length  of  time  the  privilege  has  to  run  and  the  difference  of 
the  stipulated  from  the  present  market  price. 

154.   Speculative  Profits  —  Function 

The  chief  economic  function  of  regular  speculation  consists  in 
the  assumption  of  risk  and  results  in  the  equalization  of  price. 

First,  as  to  the  assumption  of  risk.  When,  under  the  stress 
of  modern  capitalism,  dealings  in  commodities  became  national 
and  even  international,  the  perturbations  affecting  market  values 
grew  to  be  so  vast  and  so  numerous  that  ordinary  business 
was  seriously  compromised  by  the  violent  fluctuations  in  the 
price  of  the  raw  materials  of  industry.  The  manufacturer 
who  bought  his  materials  in  the  international  market  expected 


§  154]  Speculative  Profits  365 

indeed  a  profit  on  the  production  of  the  finished  article,  but 
was  unwilling  to  have  this  profit  turned  into  loss  by  sudden 
changes  in  the  price  of  the  raw  material.  It  was  to  secure  an 
escape  from  the  risks  of  such  oscillations  that  a  special  class 
arose  which  assumed  this  risk  and  by  concentrated  attention 
derived  a  profit  from  the  price  fluctuations. 

The  first  way  in  which  risk  is  minimized  for  the  ordinary 
business  man  and  assumed  by  a  regular  speculative  class  is 
through  the  provision  of  a  continuous  open  market.  A  cotton- 
spinner,  for  instance,  accepts  an  order  for  goods  to  be  delivered 
in  a  year,  and  expects  to  begin  spinning  in  six  months.  Unless 
he  is  able  to  buy  now  the  cotton  to  be  delivered  then,  he  will 
be  at  the  mercy  of  the  chance  variations  in  the  cotton  market, 
and  although  he  may  be  the  most  capable  of  business  men 
his  entire  profit  may  be  wiped  out  by  a  rise  in  the  price  of 
cotton.  The  cotton  future  enables  him  to  eliminate  this  risk. 
The  same  is  true  of  futures  in  wheat  or  other  commodities. 
It  applies  equally  to  the  stock  exchange.  If  a  railway  or 
other  industry,  in  launching  a  new  enterprise,  had  to  depend 
on  the  chance  investors  at  the  time  of  the  issue  of  the  securi- 
ties, it  would  be  seriously  hampered.  The  mere  knowledge 
that  at  any  moment  there  will  be  a  ready  sale  on  the  exchange 
greatly  increases  the  circle  of  purchasers,  many  of  whom  may 
not  intend  to  be  permanent  investors.  The  stock  exchange 
aids  the  investment  of  capital,  as  the  produce  exchange  aids 
the  production  of  finished  commodities.  Business  orders  and 
corporate  needs  are  intermittent,  because  they  depend  on 
temporary  exigencies;  the  risks  at  one  end,  at  all  events,  arc 
eliminated  by  the  unintermittent,  continuous  market  which 
regular  speculation  affords.  The  cotton  exchange  was  the 
result  of  the  disorganization  of  the  cotton  trade  after  the  civil 
war;  speculation  in  all  the  other  staples  has  in  the  same  way 
been  the  consequence  of  the  efforts  of  the  manufacturer  to 
avert  the  risks  of  intermittent  and  spasmodic  fluctuations  in 
the  raw  material. 


366  Profits  [§  154 

A  natural  and  more  recent  outcome  of  this  attempt  to  avoid 
risk  is  the  practice  of  "hedging"  or  "covering"  transactions. 
An  English  miller,  for  instance,  needs  wheat  in  February  and 
buys  his  supply  in  California,  let  us  say,  at  a  price  of  90  cents 
a  bushel.  By  the  time  the  wheat  reaches  his  mill  and  the  flour 
has  been  finally  disposed  of,  it  may  be  September,  and  the  price 
of  wheat  may  have  fallen  to  75  cents,  with  a  corresponding  fall 
in  the  price  of  flour.  To  protect  himself  against  such  a  loss 
the  miller  sells  in  February  at  Chicago  for  September  delivery 
the  same  quantity  of  wheat  for  the  same  price  as  that  at  which 
he  bought,  90  cents.  When  September  arrives,  he  again  enters 
the  Chicago  market  and  makes  good  his  delivery  contract  by 
buying  the  wheat  at  the  market  price  of  75  cents.  His  profits 
in  this  deal  equal  his  losses  in  the  other,  and  by  this  process  of 
"hedging"  contracts  he  eliminates  all  risk  in  price  fluctuations 
due  to  the  raw  material.  He  is  content  to  derive  his  gains 
from  the  profits  of  his  legitimate  milling  business.  Through 
the  use  of  such  wheat  and  cotton  futures  we  thus  have  the 
paradoxical  result  that  the  business  man  often  resorts  to  specu- 
lation in  order  to  free  his  business  from  speculative  influences. 

The  result  of  regular  speculation,  again,  is  to  steady  prices. 
If  with  wheat  prices  at  80  cents  a  bushel  there  is  a  prospect 
of  a  large  crop,  the  intelligent  speculator  will  sell  short  (a 
future)  say  at  70  cents,  expecting  to  buy  in  at  65  cents.  All 
this  selling  on  the  part  of  the  bears,  however,  tends  to  reduce 
present  prices  and  thus  to  increase  consumption,  which  again 
tends  to  keep  the  future  price  from  falUng  so  low  or  so  suddenly 
as  it  would  otherwise  have  done.  Vice  versa,  if  a  crop  short- 
age is  in  prospect,  prices  tend  to  rise,  the  commodity  becomes 
a  "good  buy"  and  the  bulls  are  active.  The  increased  pur- 
chases tend  to  raise  present  prices  and  to  check  consumption, 
while  the  owners  in  a  rising  market  hold  on  for  the  prospec- 
tive profit.  This  combination  of  a  somewhat  smaller  demand 
and  a  larger  supply  will  prevent  such  a  sharp  rise  in  prices  as 
would   ordinarily  follow  a  bad  crop.     Speculation  thus  tends 


§  154]  Speculative  Profits  367 

to  equalize  demand  and  supply,  and  by  concentrating  in  the 
present  the  influences  of  the  future  it  intensifies  the  normal 
factors  and  minimizes  the  market  fluctuation.  Speculation 
hence  exerts  a  directive  influence  on  price.  A  good  example  of 
this  is  afforded  by  the  Gold  Law  during  the  civil  war.  The 
discount  on  greenbacks  was  mistakenly  ascribed  to  the  specu- 
lation on  the  gold  exchange,  and  a  law  was  enacted  to  prohibit 
all  such  transactions.  As  a  result,  the  premium  on  gold  jumped 
at  once  from  195  to  285,  with  wild  fluctuations  day  by  day,  to 
be  followed,  after  the  hasty  repeal  of  the  law  fifteen  days  later, 
by  just  as  sudden  a  recession  of  the  price. 

Speculation  is  hence  so  perplexing  a  phenomenon  because 
of  its  Janus-like  aspect.  So  far  as  it  has  become  the  regular 
occupation  of  a  class,  differentiated  from  other  business  men 
for  this  particular  purpose,  it  subserves  a  useful  and  in  modern 
times  an  indispensable  function.  The  expert  dealer  on  the 
exchanges,  who  studies  and  prejudges  the  market,  will  in  the 
long  run  secure  profits  by  reducing  risks  and  steadying  prices. 
In  this  wider  sense  speculative  profits  are  earned  like  other 
profits.  On  the  other  hand,  numbers  of  individuals  without 
experience  or  ability  are  constantly  taking  "flyers"  on  the 
exchanges,  and  gamble  in  securities  or  commodities  as  they 
would  in  cards.  Speculation  here  is  as  demoralizing  to  earnest 
effort  and  thrift  as  is  the  lottery.  Moreover,  even  the  profes- 
sional dealer  will  often  indulge  in  what  we  have  termed  spo- 
radic speculation,  and  by  an  extensive  manipulation  of  the 
market  bring  about  the  unsteadying  of  prices  usuaUy  connected 
with  a  "squeeze"  or  a  "corner."  Diftlcult  as  it  is  to  draw 
the  line  in  practice,  the  distinction  between  economic  and 
uneconomic  speculation  is  faintly  recognized  in  the  ordinary 
attitude  toward  the  bucket-shop  as  compared  to  the  stock 
exchange.  It  will  be  more  clearly  appreciated  in  the  future 
when  the  exchanges  themselves  exercise  a  more  rigid  scrutiny 
over  the  actions  of  their  members,  and  when  business  ethics 
will  be  lifted   to  a  higher  plane  of  social   responsibility.     At 


368  Profits  [§  155 

present  speculation  has  its  economic  abuses  as  well  as  its  eco- 
nomic function. 

155.   Monopoly  Profits 

In  the  preceding  discussion  profits,  whether  ordinary,  alea- 
tory or  speculative,  have  been  assumed  to  be  subject  to 
competitive  influences.  The  free  play  of  competition,  how- 
ever, is  often  obstructed  by  natural  or  artificial  barriers.  When 
these  obstacles  are  only  partial,  we  speak  of  economic  friction; 
when  they  are  complete,  we  are  in  the  presence  of  monopoly. 
In  the  case  of  friction,  the  fortunate  possessor  of  the  tempo- 
rary advantages  secures  an  extra  gain,  which,  as  we  know,  will 
ultimately  disappear.  In  the  case  of  monopoly  the  extra 
gain  seems  to  be  permanent.  In  a  deeper  sense,  however, 
even  monopoly  profits  are  not  permanent.  This  is  due  to 
the  principle  of  capitalization,  discussed  above  (ch.  xiv).  As 
soon  as  the  monopoly  producer  disposes  of  his  business,  the 
profits  are  capitalized  into  the  higher  selling  price,  and  the 
new  purchaser  will  secure  only  the  interest  on  the  capital 
outlay.  While  monopolies  are  often  sold,  the  same  result 
is  reached  through  the  modern  corporate  form  of  business. 
For  here  the  securities,  which  entitle  each  holder  to  a  share  of 
the  monopoly  profits,  are  so  influenced  by  the  forces  of  the 
market  that  large  dividends  are  at  once  capitalized  into  higher 
market  prices,  with  the  result  that  the  net  returns  to  the  new 
purchaser  will  be  only  the  current  market  rate  of  interest. 
Thus,  under  modern  economic  conditions,  even  monopoly 
profits  tend  to  dissipate  themselves.  They  are  essentially 
transitory,  except  in  the  hands  of  the  original  owners.  With 
the  continual  shifting  of  ownership,  so  characteristic  of  mod- 
ern life,  the  original  possessors  soon  disappear.  Since,  how- 
ever, the  original  owners  at  any  given  time  are  an  appreciable 
body,  monopoly  profits  often  assume  a  great  importance. 

Monopoly  incomes,  like  competitive  incomes,  are  not  limited 
to  profits.     A  class  of  workmen  may  be  able  to  restrict  entrance 


>^  155]  Monopoly  Profits  369 

to  their  Irade  or  to  prevent  competition  with  it.  In  that  case 
they  would  secure  monopoly  wages.  Where  the  investments 
hy  banks,  savings  institutions  or  trust  estates  are  confined  by 
law  to  a  specific  kind  of  bond,  there  is  virtually  an  element 
of  monopoly  in  the  price  of  that  security.  Where  a  particu- 
lar city  plot  is  wanted  for  specific  purposes,  the  element  of 
superiority  in  the  site  approaches  so  close  to  monopoly  that  we 
can  without  gross  error  speak  of  a  monopoly  rent.  Monopoly 
profits,  however,  like  all  profits,  are  a  result  of  price.  As  we 
have  already  discussed  the  diflferences  between  monopoly  price 
and  competitive  price,  we  may  pass  these  by  in  this  place  with 
the  mere  reminder  that  monopoly  profits  are  by  no  means 
without  bounds.  The  two  natural  limitations  on  monopoly 
price,  and  hence  on  monopoly  profits,  are  the  existence  of 
substitution  and  of  potential  competition.  In  the  first  place, 
as  we  have  learned  (p.  258),  even  where  the  monopolist  is 
securely  intrenched,  there  is  always  a  point  of  maximum  mo- 
nopoly revenue  depending  on  the  price  at  which  the  greatest 
sales  can  be  eflfected.  Any  increase  of  price  above  that  point 
will  lead  to  the  falling  off  of  sales  through  the  substitution  of 
some  analogous  commodity,  and  thus  to  a  decrease  of  profits. 
The  failure  of  the  Secretan  corner  in  copper  was  largely  due  to 
the  unexpected  use  of  substitutes,  caused  by  the  forcing  up  of 
the  price.  Secondly,  when,  as  in  many  cases,  the  monopolist 
is  subject  to  the  potential  competition  not  of  similar  com- 
modities but  of  other  possible  producers  of  the  same  commod- 
ity, his  tendency  to  raise  prices  will  be  limited  by  the  danger 
not  only  of  a  falling  off  in  the  general  demand,  but  of  the  cap- 
ture of  a  part  of  this  existing  market  by  some  new-comer  w-ho 
is  tempted  by  the  prospect  of  similar  profits.  Within  these 
limits,  however,  there  is  still  a  large  field  for  the  extra  gains 
known  as  monopoly  profits.  Where  the  monopoly  is  based 
upon  the  existence  of  patents  or  copyrights  the  extra  gains 
are  deemed  legitimate;  but  only  because  their  continuance  is 
supposed  to  be  strictly  limited. 


370  Profits  [§  156 

156.   Regulation  and  Justification  of  Profits 

The  demand  for  governmental  control  of  profits  comes  from 
three  sources,  —  those  who  object  to  ordinary  profits  because 
they  oppose  private  property;  those  who  decry  aleatory  and 
especially  speculative  profits;  and  thirdly,  those  who  desire  to 
eliminate  monopoly  profits.  Let  us  discuss  these  in  inverse 
order. 

(i)  Unrestricted  monopoly  profits,  are  of  course,  socially  un- 
desirable. Even  where  monopoly  is  not  in  itself  objectionable, 
as  in  special  fields  like  transportation  and  certain  municipal  en- 
terprises, some  substitute  for  the  automatic  regulative  action  of 
competition  must  be  secured.  Experience,  however,  has  re- 
peatedly shown  that  this  cannot  take  the  form  of  a  regulation 
of  profits.  The  most  recent  attempt,  as  that  of  Massachusetts 
with  the  gas  companies,  has,  like  all  its  predecessors,  been  frus- 
trated by  the  ease  with  which  profits  can  be  adroitly  diverted 
into  the  income  of  subsidiary  enterprises.  Efforts  to  regulate 
profits  always  result  in  profits  nominally  within  the  limit.  The 
only  two  effectual  ways  to  deflect  monopoly  profits  to  the  pub- 
lic are  either  to  regulate  prices,  which  will  prevent  the  profits, 
or  to  tax  the  enterprise,  which  will  reduce  the  profits.  The 
surest  method,  however,  of  eliminating  monopoly  profits  is 
to  eliminate  the  monopoly  by  keeping  open  the  door  of 
opportunity. 

(2)  Speculative  profits,  on  the  other  hand,  cannot  be  reached 
in  this  way.  Monopoly  can  be  distinguished  from  competition, 
but  regular  speculation  cannot  be  sharply  set  off  from  ordinary 
business.  The  recent  anti-option  laws  of  Germany  have  either 
been  ineffectual  or  have  done  harm  in  preventing  the  legiti- 
mate and  economic  benefits  of  speculation.  To  prohibit  spec- 
ulation is  to  prevent  the  good  as  well  as  the  evil.  Taxation, 
again,  is  applicable  only  to  certain  aleatory  profits.  The  effort 
to  tax  speculative  profits  encounters  the  well-nigh  insuperable 
difficulty  of  causing  the  tax  to  be  actually  borne  by  the  recip- 


§  156]         Regulation  and  Justification  371 

ient  of  the  profits.  Finally,  the  prohibition  of  speculative 
prices  is  virtually  equivalent  to  the  futile  prohibition  of  spec- 
ulation itself. 

(3)  The  opposition  to  ordinary  profits  emanates  from  those 
who  deprecate  the  entire  constitution  of  modern  industrial 
society.  According  to  Marx,  for  instance,  profits  are  a  defal- 
cation from  wages.  Since  all  value,  according  to  him,  is  the 
product  of  labor,  the  surplus  value  which  is  called  profits  is 
a  surplus  filched  from  wages.  The  socialist  theory  of  surplus 
value,  however,  is  defective  in  four  points:  {a)  It  identifies 
labor  with  manual  work  and  neglects  the  wages  of  superintend- 
ence; (6)  it  ascribes  value  to  labor,  whereas  labor  is  not  the 
cause  of  value;  (c)  it  reduces  the  factors  of  production  to  one, 
whereas  in  actual  Ufe  there  are  almost  always  more  than  one; 
(d)  above  all,  it  overlooks  the  fact  of  marginal  value.  Even 
if  we  roughly  state  that  prices  vary  according  to  cost  of  pro- 
duction, and  even  if  for  purposes  of  argument  we  concede 
that  cost  of  production  is  reducible  to  wages,  all  this  would 
apply  only  to  marginal  cost.  The  marginal  producer,  however, 
normally  earns  no  profits,  and  the  surplus  which  is  secured 
by  the  intramarginal  producer  may  come  from  a  dozen  other 
sources  than  wages.  In  point  of  fact  it  is  most  unlikely  to 
come  from  wages,  since  wages  under  competitive  conditions 
are  apt  to  be  the  same  for  the  identical  work  in  all  the  Enter- 
prises, whether  marginal  or  intramarginal.  Profits  are  indeed 
a  surplus,  but  they  are  not  a  surplus  of  the  kind  imagined  by 
the  socialists.  The  only  way  to  get  rid  of  profits  is,  as  the 
socialists  correctly  state,  to  abolish  private  property  in  tlie  fac- 
tors of  production.  The  abolition  of  private  property,  how- 
ever, would  be  the  abolition  of  progress. 

This,  of  course,  does  not  imply  that  all  existing  profits  are 
defensible.  Fraud  and  chicanery  still  stalk  abroad;  illegitimate 
privileges  are  seized  or  extorted;  unfair  advantage  is  taken  of 
weakness  or  ignorance;  public  franchises  are  dishonestly  ac- 
quired or  inadequately  compensated.     All  this  is  to  say  that 


372  Profits  [§  156 

many  individuals  are  slill  on  a  low  plane,  and  that  the  level  of 
commercial  morality  is  not  so  high  as  it  ought  to  be  and  as 
it  some  day  will  be.  This,  however,  does  not  touch  the  legiti- 
macy of  profits  as  an  institution.  Profits  honestly  acquired  are 
in  the  main  an  inevitable  concomitant  of  private  property. 
With  monopolies  reduced  to  a  minimum,  with  special  privi- 
leges abolished  or  adequately  compensated,  with  speculation 
restored  to  its  true  economic  function  and  with  competition 
conducted  on  the  high  plane  of  honesty  and  fair  dealing,  profits 
will  be  purged  of  their  alloy  and  will  stand  forth  in  their  true 
light  as  the  legitimate  fruit  of  energy  and  foresight. 


CHAPTER    XXIV 
RENT 

157.   References 

J.  B.  Clark,  Distribution  (1899),  ch.  xxiii;  F.  A.  Fetter,  Principles 
(1915).  part  2;  A.  S.  Johnson,  Rent  in  Modern  Economic  Theory  (1902), 
chs.  iii,  iv;  A.  Marshall,  Principles  (1910),  bk.  v,  chs.  viii-x,  and  bk.  vi, 
ch.  ix;  N.  G.  Pierson,  Principles  (1902),  part  i,  ch.  ii;  W.  S.  Jevons, 
Theory  (1888),  ch.  vi;  H.  Sidgwick,  Principles  (1883),  bk.  ii,  ch.  vii; 
F.  V.  Wieser,  Natural  Value  (1893),  bk.  iii,  part  2;  T.  N.  Carver,  Dis- 
tribution (1904),  ch.  v;  A.  W.  Flux,  Principles  (1904),  ch.  vii;  H.  R 
Seager,  Principles  (1913),  ch.  xiv;  The  Relation  between  Rent  and  Interest 
(A.  Discussion  in  Am.  Econ.  Assoc.  Publications,  New  Series,  V,  1904); 
M.  Pantaleoni,  Pure  Economics  (1898),  part  3,  ch.  iv;  J.  S.  Nicholson 
Principles  (1893-1901),  bk.  ii,  ch.  xiv,  and  bk.  iv,  ch.  v;  W.  Smart,  Dis- 
tribution (1899),  ch.  xx\4;  R.  M.  Hurd,  Principles  of  City  Land  Values 
(1903);  F.  W.  Taussig,  Principles  (191 1),  chs.  xl-xliv;  W.  H.  Dawson, 
The  Unearned  Increment  (1890) ;  H.  George,  Progress  and  Poverty  (1879); 
E.  R.  A.  Seligman,  Essays  in  Taxation  (1913),  ch.  iii;  J.  B.  Clark,  Essen- 
tials (1907),  ch.  x;  H  L.  Butterworth,  The  Farmer  and  the  New  Day 
(1919);  W.  B.  Bizzell,  Farm  Tenantry  in  the  U.  S.,  Texas  Agric.  Station 
Bulletm278  (i92i);H.  C.Tdiylor,  Agricultural  Economics,  newed.  (1919). 

158.   Nature  of  Rent 

Rent,  as  we  have  learned,  is  the  product  of,  or  income  from, 
the  single  use  or  succession  of  limited  uses  of  a  thing,  and 
rental  value  is  to  be  contrasted  with  capital  value.  In  ordinary 
parlance,  however,  rent  signifies  the  money  payment  to  the 
owner  for  such  a  limited  use.  According  as  we  regard  it  from 
the  point  of  view  of  making  or  of  receiving  the  payment,  to 
rent  anything  is  to  dispose  of  or  to  pay  for  its  use.  When 
the  social  conditions  are  such  that  some  one  commodity  is 
commonly  rented  instead  of  sold,  its  income  in  general  is  apt  to 
be  called  rent.  This  was  true  of  land  during  the  middle  ages 
in  Europe,  and  is  still  true  in  those  countries  where  mediaeval 

373 


374  Rent  [§  158 

customs  survive  or  where  modern  conditions  have  brought 
about  a  relation  of  hmdlord  and  tenant.  Since  most  of  the 
land  is  rented,  rent  has  come  to  mean  the  income  from  land, 
whether  rented  or  not;  and  since  the  chief  thing  that  is  usually 
rented  is  land,  rent  is  often  made  synonymous  with  the  income 
from  land  alone. 

It  is  obvious,  however,  that  this  is  doubly  confusing.  In  the 
first  place,  in  some  countries  land  is  more  commonly  sold  than 
rented.  This  is  the  case  with  agricultural  land  in  a  community 
of  peasant  proprietors  or  of  individual  farmers;  and  with  urban 
land  in  all  those  districts  where  the  inhabitants,  rich  or  poor,  own 
their  homes.  When  land  is  sold  instead  of  rented,  the  pro- 
ceeds certainly  do  not  constitute  a  rent.  They  should  rather 
be  called  a  capitalization  of  the  rent,  because  they  involve  a 
payment  for  all  future  uses.  Secondly,  other  things  are  often 
more  commonly  rented  than  is  land.  Apart  from  the  fact  that 
the  rental  of  real  estate  frequently  included  the  rent  of  a  house, 
which  is  economically  distinct  from  the  land,  men  may  live  in 
their  own  houses  and  yet  rent  telephones  by  the  year,  carriages 
by  the  month,  plants  by  the  week,  and  awnings  or  table  fur- 
nishings by  the  day.  Land  rent  is  qualitatively  only  an  in- 
significant part  of  all  rent. 

Nevertheless,  land  is  quantitatively  so  important  as  compared 
with  any  other  single  commodity,  and  possesses  so  unique  a 
social  significance,  that  the  income  from  land  merits  a  separate 
study.  It  must  be  remembered,  however,  that  the  utility  of 
such  an  independent  discussion  emerges  only  when  we  regard 
society  from  the  point  of  view  of  change,  —  that  is,  when  we 
consider  rent  historically,  or  compare  the  growth  of  land  rent 
with  that  of  other  rents.  If  we  take  a  cross  section  of  society 
at  any  moment,  and  analyze  the  distribution  of  the  social 
income,  the  rent  of  land  is  to  be  explained  in  no  different  way 
from  that  of  other  things.  The  rent  of  land  is  its  economic 
product,  that  is,  the  contributioia  of  land  over  and  above  that 
of  the  labor  and  the  capital  employed  on  the  land.     The  law 


§  159]  Land  Rent  375 

which  at  any  given  moment  governs  the  relation  of  the  land  to 
its  product  is  the  same  as  that  which  governs  the  relation  of 
any  economic  good  or  factor  of  production  to  its  product. 
Much  confusion  has  resulted  from  the  failure  to  observe  this 
warning. 

The  traditional  law  of  rent,  for  instance,  includes  three  state- 
ments: rent  is  the  result  of  the  law  of  diminishing  returns; 
rent  is  a  differential  or  surplus  over  marginal  or  no-rent 
land;  rent  is  not  a  part  of  cost  of  production.  So  far  as 
these  statements  are  true,  however,  they  are  not  peculiar  to 
land  rent. 

159.   Relation  of  Land  Rent  to  Other  Rents 

The  law  of  diminishing  returns  is  indeed  the  foundation  of 
the  law  of  rent.  A  farmer  will  sometime  reach  a  point  where 
it  will  not  pay  to  add  another  laborer  or  another  machine 
to  his  land,  because  beyond  the  margin  of  profitable  expendi- 
ture every  additional  "dose"  of  capital  or  labor  wiU  mean 
a  return  insufllcient  to  cover  cost.  In  every  case  he  will  reach 
the  extensive  or  intensive  margin  of  the  utilization  of  land. 
This,  however,  is  not  peculiar  to  the  landowner.  The  capitalist 
will  also  reach  a  point  where  it  will  not  pay  him  to  buy  more 
machines  of  a  certain  kind,  or  to  build  another  factory  devoted 
to  some  particular  product;  and  the  laborer  will  reach  the  point 
where  he  cannot  profitably  work  any  longer.  The  law  of 
diminishing  returns  is  universal,  and  applies  to  everything  thivl 
possesses  value  (§  88).  If  it  explains  the  rent  of  land,  it  will 
equally  explain,  as  we  shall  see,  the  interest  of  capital  and  the 
wages  of  labor. 

Secondly,  it  is  said  that  land  rent  is  a  differential  or  surplus. 
So,  however,  is  every  other  kind  of  rental  value.  The  value 
of  everything  is  a  differential  or  surplus  as  compared  with  the 
value  of  something  else  lower  down  in  the  scale.  It  may  be 
claimed  that  land  rent  differs  from  other  rents  in  that  the  land 
at  the  margin  is  no-rent  land,  and  that  land  rent  is  therefore 


37^  Re'^t  [§  159 

due  to  the  differences  in  the  productivity  of  good  land  over 
no-rent  land.  To  this  the  obvious  rejoinder  may  be  made  that 
we  can  equally  well  speak  of  the  no-rent  machine  or  the  no- 
rent  factory.  The  reason  that  we  do  not  commonly  use  such 
terms  is  because  machines  and  factories  are  not  so  frequently 
rented  as  is  land.  The  principle,  however,  is  identical.  The 
land  at  the  margin  may  be  so  poor  that  no  rent  will  be  paid 
for  its  use;  but  the  machine  at  the  margin  may  also  be  worth- 
less in  just  the  same  sense.  In  fact,  as  we  have  seen  in  the 
last  chapter,  the  existence  of  profits  depends  upon  the  surplus 
earnings  of  the  intramarginal  producers.  It  makes  no  differ- 
ence whether  the  marginal  producer  uses  poor  land  or  poorly 
situated  land  or  poor  machinery  or  poor  buildings  or  poor 
workmen,  he  will  earn  no  surplus.  From  this  point  of  view 
rent  is  analogous  to  profit:  profit  is  the  surplus  over  income 
of  the  no-profit  producer;  rent  may  be  said  to  be  the  surplus 
over  the  income  from  the  no-rent  commodity.  This  has  led 
some  writers  like  Walker  to  maintain  that  the  laws  of  profit 
and  rent  are  identical. 

It  would  be  an  error,  however,  to  press  too  closely  this 
analogy  between  rent  and  profit.  In  the  first  place,  rent  is  a 
surplus  only  in  the  sense  that  everything  positive  is  a  surplus 
over  zero,  —  a  statement  which  is  of  little  help.  The  rent  of  a 
boat  is  a  surplus  over  that  of  a  no-rent  boat;  the  wages  of  a 
laborer  is  a  surplus  over  that  of  the  convict  or  no-wage  laborer; 
frhe  interest  of  capital  is  a  surplus  over  the  capital  so  invested 
as  to  earn  no  interest.  But  secondly,  if  we  regard  rent  as  a 
surplus,  it  differs  from  profit  in  that  rent  is  a  permanent,  and 
profit  aAransitory,  surplus.  If  a  machine  is  used  in  a  factory, 
a  certain  part  of  the  product  will  be  traceable  to  it;  that  is,  it 
will  earn  a  certain  return  or  rent  for  its  owner.  Under  free 
competition  the  price  of  that  machine  will  be,  as  we  know,  the 
capitalization  of  its  rent,  due  regard  being  had  to  the  number 
of  machines.  In  a  state  of  normal  equilibrium  the  conditions 
of  supply  and  demand  will  so  adjust  themselves  that  the  mar- 


§  159]  Land  Rent  377 

ginal  producer  will  in  the  long  run  give  for  a  commodity  only 
^\hat  he  can  get  out  of  it,  and  others  will  not  give  more.  If 
all  the  machines  are  precise  duplicates  and  are  worked  under 
tlie  same  conditions,  their  earnings  or  rent  will  in  the  long  run 
he  equivalent  to  the  interest  on  the  capital  invested  in  them. 
1 1  will  be  a  permanent  return  as  long  as  the  machines  work  in 
unimpaired  efficiency.  If  the  machines  did  not  earn  the  rent, 
no  one  would  buy  them  at  that  capitalized  price.  On  the  other 
hand,  the  only  way  in  which  profits  can  be  secured  is  by  the 
owner  working  his  machine  under  different  conditions,  that  is, 
by  giving  it  more  care  and  combining  it  with  different  propor- 
tions of  labor  or  land,  taking  advantage  of  variations  in  the 
market,  and  so  on.  These  profits,  as  w-e  kno\v,  are  under  com- 
petitive conditions  essentially  transitory,  and  w'ill  disappear  un- 
less renewed  by  the  use  of  new  machines  or  a  new  shifting  of  the 
productive  factors.  If  better  machines,  however,  are  used,  the 
surplus  gains  secured  by  the  producer  are  really  the  difference 
in  the  rent  or  product  of  the  good  machine  over  that  of  the 
poorer  machines  of  his  competitors.  To  the  extent  that  his 
profits  are  a  differential  derived  solely  from  the  use  of  the 
better  machine,  he  can  enjoy  them  only  as  long  as  he  guards 
the  secret,  that  is,  as  long  as  he  retains  a  monopolistic  advan- 
tage. Even  in  the  case  of  monopoly,  however,  the  profit,  as  we 
know,  w^ill  disappear  through  the  process  of  capitalization  as 
soon  as  the  machine  or  the  business  changes  hands.  Thus, 
while  the  rent  is  permanent,  the  profit  is  transitory. 

Precisely  the  same  is  true  of  land  rent.  If  in  a  certain 
section  of  a  city,  where  for  a  long  time  there  has  been  no 
change,  there  are  a  hundred  equally  desirable  contiguous  lots, 
each  of  them  will  rent  for  the  same  amount.  The  rent  is  a 
differential  only  as  compared  with  less  eligible  sites  yielding  a 
lower  rent,  and  finally  with  land  on  the  outskirts,  which,  like 
the  Hoboken  flats  near  New  York,  is  worthless  for  residential, 
business,  farming  or  other  purposes,  and  which  therefore  has 
no  capital   value   because   it    yields   no   rent    and    no   product. 


3/8  Rent  [§  i6o 

Competition  among  the  hundred  lots  will  inevitably  keep  the 
rent  of  all  at  a  point  corresponding  to  the  interest  on  their 
capital  value.  The  landowner  can  earn  no  surplus  on  this 
investment  as  long  as  conditions  do  not  change.  If,  however, 
a  new  street  is  opened,  or  for  some  reason  one  of  the  lots 
acquires'  a  higher  rent,  the  landowner  will  secure  a  surplus  over 
the  interest  on  the  original  purchase  price.  Whether  this  sur- 
plus is  called  profit  or  rent  is  often  thought  to  be  immaterial: 
in  point  of  fact,  when  a  man  sells  his  land  he  calls  it  profit; 
but  until  he  sells  he  calls  it  rent.  Strictly  speaking,  however, 
the  annual  rent  is  the  total  periodic  return  of  the  land,  the 
profit  only  the  surplus  of  this  periodic  return  over  the  cost, 
or  in  this  case  over  the  interest  on  the  invested  capital.  As 
soon  as  the  plot  is  again  sold,  the  price  which  yields  the  old 
owner  the  profit  is  necessarily  the  price  at  which  the  rent  will 
yield  the  new  owner  only  interest  on  the  capital.  Profits  are 
thus  automatically  extinguished  by  transfers.  Rent  is  perma- 
nent as  long  as  the  rent-bearing  investment  lasts;  profit  disap- 
pears each  time  that  it  is  capitalized  into  a  new  selling  price. 
The  difference  between  rent  and  profit  is  applicable  to  land 
just 'as  to  other  things. 

160.   Rent  and  Price 

Thirdly,  it  is  stated  that  land  rent  is  not  a  part  of  cost,  and 
that  high  rents  are  therefore  a  result,  not  a  cause,  of  high 
prices.  It  is  no  doubt  true  that  if  wheat  is  raised  on  land 
which  differs  in  fertility  or  situation,  competition  will  force  the 
price  of  all  the  wheat  of  the  same  grade  up  to  the  cost  of 
the  marginal  producer,  that  is,  the  farmer  on  the  poorest  land. 
The  intramarginal  farmer  wiU  secure  a  surplus;  and  if  we  call 
this  differential  surplus  rent,  it  may  be  said  that  this  differential 
does  not  enter  into  the  price.  Precisely  the  same,  however,  is 
true  of  every  other  share  in  distribution.  Substitute  for  the 
plots  of  land  sewing-machines  rented  out  by  the  month  or 
year.     Some  of  the  machines  will  turn  out,  let  us  say,  more 


§  i6o]  Rent  and  Price  379 

vests  of  the  same  quality  than  others.  All  the  vests  will  sell 
at  the  same  price,  namely,  the  cost  of  the  marginal  f)roducer 
with  the  poorest  machine,  and  the  difference  between  the 
marginal  product  and  the  output  of  the  better  machine  will 
under  competitive  conditions  go  as  a  surplus  rent  to  the  owner 
of  the  better  machine.  The  surplus  seems  to  be  not  a  part 
of  the  price.  Again,  different  employers  may  utilize  different 
grades  of  workmen  to  fell  trees  or  to  build  railways.  One  uses 
a  three-dollar  American,  another  a  two-dollar  French  Canadian, 
another  a  dollar  Italian.  Yet,  as  Lord  Brassey  discovered  in 
railway  construction,  the  high-price  workman  is  not  really  more 
expensive,  because  his  output  is  greater.  If  he  did  not  earn 
the  higher  wage,  he  would  not  in  the  long  run  get  it.  Since 
all  the  trees  sell  at  the  same  price,  namely  that  of  the  marginal 
producer  who  is  using  the  least  efficient  workmen,  the  higher 
wage  of  the  American  represents  a  surplus  product  or  labor 
rent  over  the  low  wage  of  the  Italian.  If  we  say  that  the  higher 
rent  of  the  good  land  does  not  enter  into  the  price  of  wheat,  we 
can  equally  well  say  that  the  higher  wage  which  represents  the 
surplus  product  of  the  American  does  not  enter  into  the  price 
of  trees.  The  good  land  rents  or  sells  for  more  because  it  pro- 
duces more,  —  the  rent  is  the  product :  the  high-grade  laborer 
secures  higher  wages  because  he  produces  more,  —  the  wage  is 
the  product.  The  wages  of  every  different  grade  of  workman 
are  a  differential  in  the  same  sense  as  the  rent  of  different  grades 
of  land  or  capital  is  a  differential. 

It  will  be  said,  however,  that  there  is  a  distinction,  because 
even  the  lowest  wages  are  beyond  peradventure  a  part  of  the 
cost.  So,  however,  is  the  rental  paid  for  the  worst  wheat  land. 
The  confusion  arises  from  supposing  that  the  worst  wheat  land 
is  no-rent  land.  It  is  indeed  no-wheat-rent  land;  but  this 
may  still  be  worth  a  considerable  sum  per  acre,  because  it  can 
be  used  for  other  purposes.  If  the  farmer  cannot  permanently 
earn  an  income  from  wheat,  he  will  raise  other  less  valuable 
cereals,  or  vegetables,  or  hay,  or  use  the  land  for  pasture.     Every 


38o 


Rent  [§  t6o 


I)iccc  of  marginal  land  —  that  is,  the  poorest  laii<l  in  use  for 
some  particular  product — is  worth  something  I'or  llie  raising 
of  a  less  valuable  product,  until  we  finally  reach  land  that  is 
worth  nothing  for  any  purpose.  In  the  cost  of  the  wheat,  there- 
fore, there  must  always  be  included  the  rent  which  the  marginal 
(or  no-wheat-rent)  land  would  earn  if  employed  for  the  next 
lower  use. 

Furthermore,  not  only  must  the  marginal  rent  always  be  in- 
cluded in  cost  and  therefore  in  price,  but  in  a  higher  sense  the 
differential  rent,  as  a  permanent  phenomenon,  also  afTects  the 
price.  The  rent  of  anything  is  its  product;  the  greater  product 
of  the  better  land  forms  as  much  an  element  of  the  supply  as 
the  smaller  product  of  the  poorer  land,  and  price  depends  on 
the  relation  of  the  total  supply  to  the  total  demand.  If  the 
better  land  yielded  less,  the  total  supply  w^ould  be  smaller  and 
the  price  would  rise,  thus  leading  to  the  cultivation  of  a  new 
marginal  land.  Price  in  general,  as  we  know  (§  112),  is  fixed 
not  by  the  marginal  or  maximum  cost  but  at  the  marginal 
cost,  and  the  margin  depends  upon  the  output  of  the  better 
grades,  receding  as  this  increases,  advancing  as  it  falls.  Every 
bushel  of  wheat,  whether  it  comes  from  good  or  poor  land, 
affects  the  supply,  the  price  and  the  margin. 

To  say  that  rent  does  not  enter  into  price  is  doubly  con- 
fusing, not  only  because  it  implies  that  land  rent  differs  in  this 
respect  from  other  rents,  but  also  because  the  general  statement 
is  itself  misleading.  If  two  different  instruments  or  two  differ- 
ent grades  of  the  same  instrument  are  permanently  used  to 
produce  a  certain  commodity,  their  rent  or  permanent  contribu- 
tion to  the  product  will  of  course  differ.  If  the  owner  of  the 
better  grade  is  magnanimous  enough  to  present  this  permanent 
surplus  to  the  one  who  rents  the  instrument,  that  is,  if  he  remits 
the  rent,  it  will  indeed  make  no  difference  in  the  price  as  long  as 
the  product  is  finally  sold  on  the  market.  In  this  sense  only 
can  it  be  said  that  rent  does  not  enter  into  price;  for  the  price 
will  be  uninfluenced  by  the  fact  whether  the  owner  retains  or' 


§  i6i]  Growth  of  Land  Rent  381 

foregoes  the  rent.  If  lie  remits  the  reiil,  it  will  (iis;ipj)ear  so 
far  as  he  is  concerneil,  and  the  rent  will  in  that  sense  not  enter 
into  price.  It  is  clear,  however,  that  what  really  disappears,  is 
not  the  rent,  but  its  original  ownership.  The  rent  still  exists 
although  it  is  now  in  the  hands  of  the  tenant.  If  a  sewing- 
machine  company  gave  certain  operators  the  use  of  the  machine 
'ree  of  rent,  and  if  the  vests  were  sold  at  an  unchanged  price, 
the  rent  would  stay  in  the  hands  of  the  operators  instead  of  the 
company.  The  only  way  the  rent  can  be  made  to  disappear 
is  to  destroy  the  product.  The  transfer  of  ownership  does  not 
blot  it  out.  The  rent  of  the  better  instrument  is  the  product  of 
the  better  instrument.  Each  unit  in  the  supply  is  a  part  of  the 
total  product  or  total  rent,  and  must  therefore  affect  the  price. 
Hence  the  rent  or  product  of  any  instrument  of  production, 
whether  it  be  land  or  capital  or  labor,  whether  it  be  marginal 
or  differential  rent,  is  really  an  element  in  the  price,  in  the  sense 
that  were  it  not  for  that  product  the  price  would  be  different. 
Land  is  here  in  precisely  the  same  position  as  other  things. 

Notwithstanding  these  analogies  of  land  rent  to  other  rents, 
however,  there  remains  one  difference  to  which  attention  has 
already  been  called.  In  the  case  of  so-called  manufactured 
commodities,  increase  of  demand  and  production  often  goes 
hand  in  hand  with  lower  price;  in  the  case  of  land  increase  of 
demand  generally  means  higher  price.  The  supply  does  not 
respond  to  the  demand  with  the  same  rapidity.  Land  is  indeed 
not  alone  in  this  respect,  for  the  same  is  true  of  many  things 
that  cannot  be  duplicated  or  easily  reproduced.  Land  is,  how- 
ever, of  such,  overwhelming  importance,  as  compared  to  those 
other  things,  that  when  we  consider  its  influence  on  the  progress 
of  value  it  is  usefully  contrasted  with  them.  We  shall  therefore 
proceed  to  consider  more  specifically  the  rent  of  land. 

161.    Growth  of  Land  Rent 

A  distinction  is  sometimes  drawn  between  land  rent  and 
ground  rent;    the  former  is  the  rent  of  land  for  securing  some 


382  Rent  [§  161 

material  produce,  the  latter  the  rent  of  ground  used  as  a  build- 
ing site.  Practically  the  distinction  is  one  between  agricultural 
and  urban  land.  Strictly  si)eaking,  however,  rural  land  can  be 
utilized  for  other  than  agricultural  purposes,  while  land  within 
the  city  limits  is  sometimes  used  for  agriculture.  According 
to  some  authors  land  rent  arises  from  the  fact  that  the  price  of 
agricultural  products  is  the  same  while  the  cost  of  production 
differs;  ground  rent,  from  the  fact  that  prices  differ  while  the 
cost  of  production  remains  the  same.  This,  however,  is  inac- 
curate. Ground  rents  differ  for  precisely  the  same  reason  as 
land  rents,  that  is,  because  city  lots,  like  country  tracts,  vary 
in  their  power  of  affording  utilities.  Both  are  productive,  even 
though  they  produce  different  kinds  of  utilities;  the  rural  land 
has  a  value  because  its  material  products  are  wanted,  the  urban 
land  because  it  is  needed  as  the  support  of  a  house  or  the  meeting- 
place  of  human  beings.  To  assert  that  the  value  of  land  is  due 
to  fertility  or  inequality  or  scarcity  or  monopoly  is  either  half 
true  or  inadequate.  Situation  is  as  important  as  fertility.  In- 
equality is  a  measure  of  the  difference  in  value,  not  the  cause  of 
value.  Scarcity  is  an  ingredient  in  the  value  of  every  economic 
good.  Monopoly  may  perhaps  be  predicated  of  particularly 
choice  sites,  but  hardly  of  land  in  general,  the  different  qualities 
of  which  shade  into  each  other  by  imperceptible  gradations, 
from  the  vast  mass  of  unoccupied  land  upward.  The  rent  of 
each  piece  of  land  is  due  to  its  productive  efficiency,  and  the 
rental  value  of  any  plot  is  the  expression  of  its  marginal  contri- 
bution to  the  product. 

In  discussing  the  growth  of  rent,  therefore,  the  location  of  the 
margin  becomes  of  importance.  We  must  remember  the  dis- 
tinction in  §  73  between  the  economic  and  the  non-economic 
margin.  The  margin  may  be  at  such  a  point  that  the  value  of 
the  contribution  is  zero.  Here  we  have  the  non-economic 
margin.  This  may  be  due  to  the  fact  that  the  land  is  either  so 
abundant  or  so  poor  in  situation  or  fertility  that  the  value  of 
the  produce  will  only  just  remunerate  the  labor  or  the  capital 


§  i6i]  Growth  of  Land  Rent  383 

employed.  The  prpduct  must  normally  suffice  to  pay  current 
wages  on  that  grade  of  labor  or  current  interest  on  that  class  of 
capital,  because  otherwise  that  labor  and  that  capital  would  be 
withdrawn  to  other  enterprises.  But  there  will  be  no  surplus. 
The  land,  in  other  words,  will  yield  no  rent,  because  its  contri- 
bution at  the  margin  is  zero.  The  value  of  the  joint  product  is 
due  wholly  to  the  labor  and  the  capital. 

If,  however,  population  grows  so  that  the  same  product  now 
acquires  an  increased  value,  there  will  be  a  surplus  ascribable 
to  the  land.  If  all  the  land  were  of  the  same  grade,  and  if  it 
remained  unaltered  in  quantity,  this  surplus  would  be  divided 
equally.  Since,  however,  land  differs  in  fertility  and  situation, 
any  increase  in  the  demand  will  result  in  the  better  grades 
securing  the  greater  part  of  the  surplus,  while  the  land  formerly 
at  the  margin  will  yield  a  small  surplus,  and  land  hitherto  un- 
utilized wiU  become  a  new  margin,  yielding  mere  wages  and 
interest.  If  for  some  reason  the  supply  of  land  cannot  be  in- 
creased beyond  a  given  point,  the  intensive  margin  will  be  moved 
up,  and  the  marginal  or  poorest  land  will  now  also  yield  a  surplus. 
The  intensive  margin  now  becomes  a  base  from  which  the 
surplus  of  all  land  is  calculated. 

The  simplest  illustration  is  urban  land.  If  a  cross  roads 
hamlet  springs  up  in  the  centre  of  an  agricultural  district,  the 
land  previously  of  use  only  for  farming  purposes  yields  an 
additional  rent  as  the  site  of  cheap  wooden  structures.  The 
margin  has  been  extended.  As  population  and  prosperity 
increase,  the  hamlet  grows  into  a  village,  a  town,  a  city,  and  the 
successive  tracts  acquire  a  rent  so  high  that  the  cottage  gives 
way  progressively  to  the  brick  building,  the  stone  mansion  and 
the  steel  sky-scraper.  Just  as  we  speak  of  pasture  land  or 
wheat  land  or  truck  gardening  land,  so  we  can  speak  of  cottage 
sites,  brick-building  sites,  stone-mansion  sites  and  sky-scraper 
sites.  Each  class  of  land  can  be  best  utilized  for  certain  pur- 
poses, and  there  are  as  many  margins  as  there  are  classes.  With 
every  change  each  margin  is  pushed  farther  out,  the  difference 


384  Rent  [§  161 

in  the  rent  of  all  intermediate  sections  being  finally  in  j)ropor- 
tion  to  the  distance  of  the  lowest  margin  or  suburban  farm 
area  from  the  centre.  The  location  of  the  margin  depends  on 
the  extent  of  the  demand  as  modified  by  the  means  of  trans- 
portation. Each  addition  to  the  demand  will  call  forth  an 
addition  to  the  total  supply,  but  since  this  addition  can  come 
only  at  the  fringe,  it  is  an  increase  of  less  eligible  land.  In- 
creased demand  for  houses  can  be  met  by  building  equally  good 
houses;  increased  demand  for  sites  can  be  met  only  by  less 
eligible  sites.  Under  ordinary  conditions  of  progress,  therefore, 
ground  rent  may  be  expected  constantly  to  increase. 

The  expectation  may,  however,  be  frustrated  not  only  by  the 
fact  that  different  sections  of  the  city  may  prosper  unequally, 
but  also  by  the  fact  that  an  improvement  in  the  means  of  trans- 
portation may  decrease  the  relative  eligibility,  and  therefore  the 
rent,  of  intermediate  sections.  These  practical  considerations 
have  an  important  bearing  on  the  problem  of  the  shifting  of  a 
tax  on  ground  rent  as  compared  to  house  rent. 

In  the  case  of  land  rent  the  interference  with  the  normal 
growth  is  more  pronounced  than  in  the  case  of  ground  rent. 
While  it  is  ordinarily  true  that  the  best  lands  will  be  first  culti- 
vated, it  has  happened  in  many  parts  of  the  world  that  the  less 
fertile  lands  on  the  hillsides  were  preferred  because  they  were 
relatively  safe  from  the  incursions  of  marauders.  With  the  ad- 
vent of  peaceful  conditions,  recourse  was  had  to  the  better 
lands  in  the  plains  or  valleys,  with  an  ensuing  fall  in  the  rent  of 
the  original  tracts.  The  same  result  is  often  brought  about  by 
the  opening  of  fertile  lands  in  newer  sections.  The  entrance 
of  the  middle  and  far  West  into  the  international  market,  with 
the  consequent  increase  of  supply  and  lower  price  of  wheat,  has 
resulted  in  a  great  fall  in  rents  in  those  parts  of  New  England 
and  Europe  exposed  to  the  competition.  Finally  is  to  be 
noticed  the  effect  of  agricultural  improvements.  If  they  apply 
to  all  lands,  they  will  lessen  the  cost,  make  possible  the  relocation 
of  a  new  and  lower  margin,  and  reduce  the  price  and  therefore 


§  162]  Land  Rent  and  Tenure  385 

the  rent  of  all  lands.  If  the  improvements  remain  for  a  time 
at  least,  the  exclusive  possession  of  the  more  ingenious  or  capable 
farmers,  whereby  their  share  of  the  increased  output  more  than 
outweighs  the  reduction  in  price,  their  rents  will  increase.  If 
this  advantage  accrues  to  entire  sections  or  countries,  the  rent 
in  them  will  grow  at  the  expense  of  the  others,  just  as  in  conse- 
quence of  improvements  in  transportation  the  rents  in  the  far 
West  of  America  have  increased,  while  those  in  New  England 
have  diminished. 

Whether  land  rents  in  general,  at  any  given  period,  will  in- 
crease or  decrease  depends  thus  on  the  relation  of  population 
to  improvements.  Growth  of  population  or  an  elevation  of  the 
standard  of  life  means  increased  demand;  improvements  in 
production  or  transportation  mean  increased  supply.  When 
the  population  keeps  ahead  of  the  improvements,  rents  will 
rise.  When  the  improvements  keep  ahead  of  the  population, 
rents  will  fall.  Since,  however,  the  demand  for  food  is  nowa- 
days of  an  international  character,  a  rise  of  rent  in  those  coun- 
tries or  sections  which  possess  or  retain  the  advantage  of  the 
improvements  will  still  be  compatible  with  a  general  increase 
in  population.  In  modern  times  the  increase  of  population  is 
more  and  more  due  to  the  growth  of  industry,  which  is  again 
ascribable  to  improvements  in  production.  At  bottom,  there- 
fore, the  growth  of  rent  depends  on  the  relative  rapidity  of 
improvements  in  industry  as  compared  with  those  of  agriculture 
or  in  industry  applied  to  agriculture.  Since  there  is  on  the 
whole  a  broader  field  for  industrial  improvement,  it  may  be 
surmised  that  ultimately  land  rents  will  normally  rise.  For 
long  periods  in  history,  however,  land  rents  may  remain  station- 
ary or  even  decline,  not  only  in  particular  countries,  as  at  present, 
but  in  the  world  at  large. 

162.   Land  Rent  and  Land  Tenure 

Since  land  rent  is  the  permanent  surplus  or  periodic  product 
of  the  bare  land,  it  is  to  be  distinguished  from  what  often  seems 


386  Rent  [§  162 

to  be  the  total  return  of  the  hind.  If  a  man  works  the  land,  a 
part  of  the  product  is  really  wages;  if  he  applies  concrete  capital 
to  the  land,  another  part  is  really  the  rent  of  those  instruments, 
which  in  the  long  run  must  be  equivalent  to  the  interest  on  the 
capital  invested  in  them;  if  he  combines  the  factors,  so  that  for 
the  time  being  he  can  undersell  his  competitors  or  secure  a 
greater  output  at  the  same  price,  still  another  part  of  the  product 
is  profits.  The  wages  and  the  interest  are  permanent;  the 
profits  will  disappear  as  soon  as  they  are  capitalized  into  a 
higher  selling  value  of  the  land  or  as  soon  as  the  methods  of  the 
more  successful  cultivator  become  general. 

When  a  farmer  owns  and  works  the  land,  it  is  difficult  to 
distinguish  these  various  shares  in  the  product.  When  the 
owner  supplies  the  land  and  part  of  the  capital  to  the  tenant 
who  does  the  work,  it  is  slightly  easier  to  disentangle  the  shares. 
When  the  proprietor  furnishes  the  land  and  the  tenant  does  all 
the  rest,  we  have  the  simplest  example.  In  such  a  case  the 
contract  rent  paid  by  the  tenant  in  money  or  in  kind  is  the 
economic  land  rent  proper;  the  surplus  above  the  contract 
rent  represents  his  wages  as  well  as  the  interest  on  his  invested 
capital  and  his  profits.  The  wages  and  interest,  as  we  shall 
soon  learn,  are  fixed  amounts,  while  any  excess  which  he  can  for 
the  time  being  retain  constitutes  his  agricultural  profits.  If, 
however,  the  profits  are  due  to  improvements  the  secret  or 
knack  of  which  the  tenant  cannot  permanently  retain  —  as, 
for  instance,  the  use  of  new  manures  or  of  better  crop  rotation 
—  they  will  disapp)ear.  According  to  the  conditions  of  the 
market  the  surplus  will  either  be  dissipated  into  lower  prices 
for  the  produce,  or,  on  the  contrary,  will  be  converted  into  a 
higher  rental  value  of  the  land.  The  only  permanent  constitu- 
ents of  the  output  or  price  under  competitive  conditions  are 
wages,  interest  and  rent. 

The  contract  rent  paid  in  money  or  in  kind  for  any  plot  of 
land  thus  tends  under  competitive  conditions  to  be  equal  to 
that  sum  which  will  just  enable  the  marginal  or  least  efficient 


§  i62]  Land  Rent  and  Tenure  387 

tenant  to  make  normal  wages  and  interest.  From  the  point  of 
view  of  profits  it  is  a  non-economic  margin  (§  73) ;  from  that  of 
interest  or  wages,  an  economic  margin.  That  is,  the  tenant 
at  the  margin  makes  no  profits,  but  if  he  did  not  get  back  his 
interest  on  capital  he  could  not  afford  in  the  long  run  to  use  the 
capital,  and  if  he  did  not  earn  current  wages  he  would  become 
a  wage-earner.  The  competition  for  different  plots  of  equally- 
good  land  tends  to  force  the  rent  up  to  the  point  where  no  profits 
are  left  for  the  least  efficient  competitor.  The  rent  paid  for 
land  is  thus  the  amount  that  is  produced  by  the  marginal  farmer 
in  excess  of  wages  and  interest.  Under  competitive  conditions 
this  excess  goes  to  the  owner,  while  any  temporary  surplus  goes 
as  profits  to  the  tenant. 

Under  actual  conditions  the  contract  rent  may  diverge  from 
the  pure  economic  rent.  This  is  due  to  economic  friction. 
Economic  rent  may  be  defined  as  the  rent  which  an  intelligent 
tenant  who  enjoys  complete  mobility  of  labor,  who  has  an 
alternative  investment  for  his  capital  and  who  is  thoroughly 
acquainted  with  the  conditions  of  the  market,  could  afford  to 
pay.  But  where  there  is  ignorance,  lack  of  opportunity  or 
lack  of  mobility  on  the  part  of  the  tenant,  actual  rent  may  be 
higher  than  economic  rent.  On  the  other  hand,  where  for 
social  or  other  reasons  the  owner  does  not  exact  the  uttermost 
farthing,  the  actual  rent  may  be  lower  than  the  economic  or 
rack  rent.  This,  however,  is  just  as  true  of  other  rents  as  of 
land  rents. 

While  the  simplest  form  of  land  rent  is  that  for  the  use  of 
the  bare  land,  experience  has  shown  the  utility  of  a  different 
method.  This  is  known  in  Europe  as  the  metayer  plan  and  in 
America  as  the  share  system,  because  the  owner  and  tenant 
share  in  the  factors  of  production  and  therefore  in  their  re- 
muneration. Share  tenure  is  thus  contrasted  with  cash  tenure, 
where  the  tenant  pays  a  cash  sum  for  the  use  of  the  land  and 
keeps  the  rest  of  the  product.  The  most  complete  develop- 
ment of  this  has  taken  place  in  the  Southern  states,  where  no 


388 


Rent  [§  162 


less  than  three  important  variations  of  the  share  system  are 
found.  They  are  known  as  the  cropping  system,  the  "third 
and  fourth"  and  "standing  rent"  methods.  In  all  cases  the 
owner  furnishes  free  of  charge  a  dwelling-house,  wood  and  water, 
pasture  for  pigs  and  cows  and  a  small  plot  for  a  truck  patch. 
In  the  cropping  system  the  tenant  or  cropper  does  all  the  work 
and  supplies  his  own  food;  the  landlord  furnishes  seed,  farming 
implements,  animals  and  half  the  fertilizer.  He  also  bears  half 
the  expense  of  ginning  and  wrapping  the  cotton.  The  crop  is 
then  divided  equally,  and  the  system  is  hence  sometimes  called 
farming  "on  halves."  In  the  "third  and  fourth"  system  the 
owner  provides  everything  except  the  labor,  the  tenant  getting 
one-fourth  of  the  crop;  or  the  tenant  furnishes  in  addition  his 
own  food  and  receives  one-third  of  the  crop.  More  commonly, 
however,  the  same  name  is  applied  to  the  system  where  the  tenant 
furnishes  labor,  tools  and  animals,  while  the  owner  gives  only 
the  house  and  land,  and  therefore  receives  only  one-third  of 
some  crops,  like  grain,  and  a  quarter  of  others,  like  cotton. 
That  is,  the  landlord  and  not  the  tenant  gets  the  third  or  the 
fourth  part  of  the  product.  In  such  cases  the  "  third  and  fourth  " 
renter  occupies  a  relatively  higher  position  than  the  mere  crop- 
per. In  the  case  of  "fixed"  or  "standing"  rent  the  landlord 
furnishes  nothing  except  the  minimum  mentioned  above  as 
common  to  all  share  systems,  and  likewise  exercises  no  super- 
vision over  the  labor  of  the  tenant.  The  "standing  rent" 
system  always  calls  for  the  production  of  some  specific  com- 
modity, while  in  the  money  or  cash  rent  system  the  tenant  is 
free  to  do  as  he  likes.  "Standing  rent"  is  thus  the  nearest 
approach  of  the  share  rent  to  the  money  rent,  and  is  naturally 
the  one  suited  to  the  better  grade  of  tenants.  In  Europe  other 
variations  of  the  system  are  introduced  by  the  apportionment 
of  taxes  between  owner  and  tenant. 

The  subject  of  hind  tenure  has  become  so  important  because 
of  the  connection  between  the  payment  of  the  rent,  the  energy 
of  the  cultivator  and  the  productivity  of  the  land,  as  well  as 


§  163]  Justification  389 

because  of  the  social  consequences  of  land  ownership.  Under 
the  feudal  system  there  was  an  almost  complete  divorce  be- 
tween owner  and  cultivator.  With  the  growth  of  prosperity 
the  serf  gradually  became  a  free  tenant,  and  in  some  parts  of 
Europe  the  tenant  has  become  a  peasant  proprietor  or  inde- 
pendent farmer.  In  Ireland  the  transition  is  still  in  process, 
and  has  been  much  facilitated  by  the  series  of  laws  which 
began  in  the  seventies  and  culminated  in  the  Land  Purchase 
Act  of  1903.  In  the  United  States,  which  was  (except  in  the 
South)  almost  from  the  beginning  the  home  of  independent 
farmers,  there  has  been  during  the  past  few  decades  an  increase 
in  the  proportion  of  farm  tenants  to  farm  owners.  This  is 
apparent  from  the  table  on  the  following  page. 

It  would,  however,  be  a  mistake  to  assume  that  the  tenants 
are  growing  at  the  expense  of  owners.  Both  owners  and  ten- 
ants are  increasing,  even  though  the  tenants  are  increasing 
faster.  In  iqoo  there  was  one  farm  owned  for  every  14  per- 
sons outside  of  cities  of  8,000  inhabitants  and  over.  In  1850 
the  ratio  of  all  farms  of  whatever  description  to  the  popula- 
tion outside  of  such  cities  was  precisely  the  same  —  i  to  14. 
It  is  clear,  then,  the  number  of  farms  cultivated  by  the  owners 
has  grown  faster  than  the  non-urban  population.  This  means 
that  the  increase  of  tenants  has  come  not  from  previous  farm 
owners  or  their  families,  but  from  previous  farm  hands  or  hired 
men.  The  growth  of  farm  tenancy,  therefore,  is  a  step  forward, 
not  backward,  in  the  condition  of  American  agriculture. 

So  far  as  owners  are  concerned,  their  burdens  will  be  con- 
siderably lightened  by  the  operation  of  the  federal  Farm  Loan 
Act  passed  in  1916  and  described  below  in  §209^^. 


163.   Justification  of  Land  Rent 

The  question  of  the  justification  of  rent  is  one  not  of  its  ex- 
istence, but  of  its  disposition.  Since  rent  is  as  much  a  part  of 
the  product   as  wages,  to   query  the   justification  of   rent   is  in 


390 


Rent 


[§163 


one  sense  as  unmeaning  as  to  query  that  of  wages.  The  rent 
which  a  tenant  pays  is  fixed  by  economic  law;  whether  he 
hands  it  to  a  private  individual  or  to  the  government  is  imma- 


Year 

Total 

Number  of 

Farms 

Number  of  Farms  Operated  by 

Per  Cent  of  Farms 
Operated  by 

Owners 

Cash 
Tenants 

Share 
Tenants 

Own- 
ers 

Cash 
Ten- 

Share 
Ten- 

ants 

ants 

United  States 

1910 

6,361,502 

4,006,826 

826,287 

1,528,389 

64.7 

13.0 

24.0 

1880 

4,008,907 

2,984,306 

322,357 

702,244 

74-4 

8.0 

17-5 

New  England 

1910 

188,802 

173,787 

12,188 

2,827 

92.0 

6.5 

1-5 

1880 

207,232 

189,572 

10,230 

7,430 

91-5 

4-9 

3-6 

Middle  Atlantic 

1910 

468,379 

364,108 

47,081 

57,190 

77-7 

lO.I 

12.2 

1880 

488,907 

395,275 

38,781 

54,851 

80.8 

7-9 

II. 2 

E.  North  Central 

1910 

1,123,489 

819,892 

99,334 

204,263 

73-0 

8.8 

18.2 

1880 

985,273 

783,782 

52,770 

148,721 

79.5 

5-4 

I5-I 

W.  North  Central 

1910 

1,109,948 

767,330 

124,539 

218,079 

69.1 

11.2 

19.6 

1880 

712,695 

566,443 

35,973 

110,279 

79-5 

5-0 

15-3 

South  Atlantic 

1910 

r, 111,881 

601,452 

200,931 

309,498 

54-1 

18.1 

27.8 

1880 

634,429 

411,673 

74,946 

157,810 

63-9 

11.6 

24-5 

E.  South  Central 

1910 

1,042,480 

513,742 

208,260 

320,478 

49-3 

20.0 

30.7 

1880 

569,739 

360,309 

76,418 

133,012 

63.2 

134 

23-3 

W.  South  Central 

1910 

943,186 

445,601 

106,220 

391,365 

47.2 

II-3 

41-5 

1880 

316,909 

205,247 

28,674 

82,988 

64.8 

9.0 

26.2 

Mountain 

1910 

183,446 

163,756 

8,726 

10,964 

89-3 

4.8 

6.0 

1880 

25,043 

23,199 

406 

1,438 

92.6 

1.6 

5-7 

Pacific 

1910 

189,891 

157,158 

19,008 

13,725 

82.8 

10.0 

7.2 

1880 

58,680 

48,806 

4,159 

5,715 

83.2 

7-1 

9-7 

terial  so  far  as  its  existence  is  concerned.     The  point  at  issue  is: 
who  should  get  the  rent,  the  individual  or  the  government. 

Private  property  in  land  rents  is  attacked  from  three  sides. 
The   communists   assail   it   because   they   condemn   all   private 


§  163]  Justification  391 

property.  The  socialists  assail  it  because  they  hold  that  the 
private  control  of  any  factor  of  production,  except  that  of 
the  laborer  by  himself,  involves  a  robbery  of  the  laborer.  The 
land  nationalizers  and  single-taxers  assail  it  because  of  an 
alleged  distinction  between  land  and  capital.  Although  the 
arguments  of  these  three  assailants  are  mutually  destructive, 
we  shall  confine  ourselves  here  to  the  last  class,  inasmuch  as  the 
arguments  of  the  communists  and  socialists,  are  not  peculiar 
to  property  in  land. 

According  to  the  single-taxers  land  rent  is  held  to  be  a  mo- 
nopoly privilege,  and  land  value  is  claimed  to  be  a  social  pro- 
duct. For  both  reasons  the  land  would  then  be  unsuited  to 
private  ownership. 

In  the  first  place,  however,  we  have  seen  that  monopoly  can- 
not well  be  predicated  of  land  in  general.  Worthless  land 
exists  in  abundance.  From  the  worthless  to  the  priceless 
lands,  however,  there  is  a  continual  gradation,  and  it  is  impos- 
sible to  say  where  relative  abundance  and  competition  stop 
and  monopoly  begins.  Even,  however,  if  the  fact  of  privilege 
is  substantiated,  it  is  not  competent  to  single  out  land.  Many 
other  privileges  are  granted  by  modern  society.  Patents  and 
copyrights  are  exceedingly  valuable,  even  if  temporary,  privi- 
leges. The  institution  of  inheritance,  whereby  society  confers 
upon  individuals  the  right  of  receiving  that  for  which  they  are 
in  no  wise  responsible,  is  a  privilege  which  in  importance  almost 
transcends  that  of  property  in  land.  Certain  corporate  fran- 
chises constitute  privileges,  the  value  of  which  may  be  only 
in  part  referable  to  the  land.  That  all  such  privileges  should 
be  paid  for  is  indeed  a  legitimate  demand;  but  to  claim  that 
this  payment  should  be  extended  to  the  point  of  the  total  value 
of  the  land  would  logically  lead  to  the  similar  claim  that  the 
total  value  of  all  inheritances,  franchises,  patents  and  copy- 
rights should  be  taken  by  the  state. 

Secondly,  the  assertion  that  land  value  differs  from  other 
values  in  that  it  is  a  social  product  involves  the  contention  that 


392  Rent  [§  163 

the  value  of  other  things  is  an  individual  product.  Individual 
l9,bor,  however,  has  never  by  itself  produced  anything  in  civil- 
ized society.  Take,  for  example,  the  workman  fashioning  a 
chair.  The  wood  has  not  been  produced  by  him;  it  is  a  gift 
of  nature.  The  tools  that  he  uses  are  the  results  of  the  con- 
tributions of  others;  the  house  in  which  he  works,  the  clothes 
he  wears,  the  food  he  eats  (all  of  which  are  necessary  in  civil- 
ized society  to  the  making  of  a  chair),  are  the  result  of  the 
contribution  of  the  community.  His  safety  from  robbery  and 
pUlage  —  nay,  his  very  existence  —  is  dependent  on  the  cease- 
less co-operation  of  the  society  about  him.  How  can  it  be 
said,  in  the  face  of  all  this,  that  his  own  individual  labor  wholly 
creates  anything?  If  it  be  maintained  that  he  pays  for  his 
tools,  his  clothing  and  his  protection,  it  may  be  answered  that 
the  land  purchaser  also  pays  for  the  land.  Nothing  is  wholly 
the  result  of  unaided  individual  labor.  No  one  has  a  right  to 
say,  "This  belongs  absolutely  and  completely  to  me  because 
I  alone  have  produced  it."     All  value  is  a  social  product. 

It  may  be  contended,  indeed,  that  the  landowner  does  noth- 
ing, while  the  carpenter,  at  all  events,  does  something.  This 
can  apply,  however,  only  to  the  absentee  owner  of  agricultural 
land  or  to  the  holder  of  city  land.  Under  the  modern  form  of 
corporate  investment,  moreover,  even  this  distinction  is  robbed 
of  much  of  its  importance.  Suppose  that  I  invest  my  capital 
in  land  or  in  the  shares  of  a  street  railway,  a  newspaper  or  a 
bank.  At  the  end  of  ten  years  I  return  and  find  that  land 
values  have  increased,  but  I  also  find  that  the  same  cause  — 
the  growth  of  population  and  prosperity  —  has  equally  en- 
hanced the  value  of  my  railway,  newspaper  and  bank  stock. 
It  is  indeed  true  that  the  growth  of  the  corporation  calls  for  a 
continually  abler  manager,  but  the  only  contribution  that  I 
personally  have  made  to  the  increased  value  may  be  a  chance 
vote  by  proxy  for  a  new  board  of  directors.  To  all  intents  and 
purposes  the  increment  is  well-nigh  as  "unearned"  in  the  one 
case  as  in  the  other. 


§  163]  Justification  393 

iL  may  nevertheless  be  conceded  ihal  there  is  a  difference 
to  this  extent,  that  ultimately  the  ownership  of  the  capital  con- 
trols its  management  and  conditions  its  most  effective  social 
utilization.  This  difference,  however,  does  not  sufifice  to  con- 
vert all  land  values  into  "unearned  increments"  and  to  make 
the  increased  values  of  other  things  "earned."  At  best  it  can 
only  justify  a  somewhat  higher  rate  of  taxation  on  land.  The 
single-tax  movement  undoubtedly  has  a  practical  validity  to 
the  extent  that  it  emphasizes  the  advantages  of  exempting  cer- 
tain classes  of  personal  property  from  taxation  for  local  pur- 
poses; but  so  far  as  it  endeavors  to  abolish  every  other  form 
of  taxation,  or  so  far  as  it  purports  to  afford  a  solution  of  a 
great  social  problem  by  confiscating  land  rents,  it  is  sadly 
inadequate.  Private  property  in  agricultural  land  has  been 
developed  in  the  course  of  long  centuries  as  the  m.ost  effective 
means  of  spurring  on  the  cultivator  to  the  best  methods,  and 
thus  uniting  individual  and  social  interests.  To  distinguish 
between  the  social  and  the  individual  causes  of  agricultural 
rent  is  impossible.  The  validity  of  agricultural  rents,  however, 
involves  that  of  other  land  rents  as  well.  It  is  only  when  the 
control  of  land  by  individuals  becomes  a  distinct  menace  to 
social  interests  that  its  rigid  regulation,  or  even  its  assumption 
by  the  community,  becomes  legitimate. 


CHAPTER  XXV 
INTEREST 

164.   References 

T.  N.  Carver,  Distribution  (1904),  ch.  vi;  J.  B.  Clark,  Distribution 
(1899),  chs.  xii,  xiii;  F.  A.  Fetter,  Principles  (1915),  part  iv;  A.  Marshall, 
Principles  (1910),  bk.  vi,  ch.  vi;  G.  Cassel,  Tlie  Nature  and  Necessity  of 
Interest  (1903);  E.  v.  Bohm-Bawerk,  Positive  Theory  of  Capital  (trans,  by 
Smart,  1891),  bk.  vii,  and  Recent  Literature  on  Interest  (trans,  by  Scott, 
1903);  N.  G.  Pierson,  Principles  (1902),  part  i,  ch.  iv;  F.  v.  Wieser, 
Natural  Value  (trans,  by  Malloch,  1893),  bk.  iv;  W.  S.  Jevons,  Theory 
(1888),  ch.  vii;  I.  Fisher,  The  Rate  of  Interest  (1907);  A.  W.  Flux,  Prin- 
ciples (1904),  ch.  vi;  M.  Pantaleoni,  Pure  Economics  (1898),  part  3,  ch. 
iii;  J.  S.  Nicholson,  Principles,  bk.  ii,  ch.  xiii;  F.  W.  Taussig,  Principles 
(191 1),  chs.  xxxviii-xl;  H.  R.  Seager,  Principles  (1913),  ch.  xvi;  G. 
Billeter,  Geschichte  des  Zinsfusses  im  Griechisch-romischen  Alterthum  bis 
auf  Justinian  (1898);  W.  J.  Ashley,  English  Economic  History  (1893), 
II,  ch.  vi;  H.  C.  Lea,  Ecclesiastical  Treatment  of  Usury  (Yale  Rev.,  II, 
1894);  G.  K.  Holmes,  Usury  in  Law  and  Practice  (Pol.  Sci.  Quart.,  VII, 
1892). 

165.   Nature  of  Interest 

To  the  ordinary  man  interest  seems  to  be  the  payment  for 
a  loan  of  money,  precisely  as  wealth  seems  to  consist  of  a  sum 
of  money.  In  point  of  fact,  however,  interest  is  paid  for  the 
use  of  the  capital  which  the  money  represents.  It  is  the  earn- 
ings or  product  of  the  fund  of  capital,  just  as  rent  is  the  earnings 
of  the  individual  pieces  of  capital.  Interest  is  commuted  rent, 
or  the  calculation  form  of  rent.  Just  as  a  business  man  must 
deduct  the  rent  or  royalty  of  some  patented  machine  used  by 
him  before  computing  his  profits,  so,  if  he  buys  the  machine 
outright,  he  must  deduct  the  interest  on  the  capital  invested  in 
the  machine.  Whether  he  uses  his  own  capital  or  borrows  it 
is  immaterial;    in  the  latter  case  it  is  loan  or  contract  interest, 

394 


§  165]  Nature  of  Interest  395 

in  the  former  it  is  natural  or  economic  interest.  The  distinction 
is  the  same  as  that  which  we  have  learned  between  contract 
and  economic  rent.  Whether  he  pays  the  interest  to  another  in 
virtue  of  some  contract  or  keeps  it  makes  no  difference.  The 
amount  of  interest,  however,  is  not  the  same  thing  as  what  is 
usually  called  the  rent  of  the  particular  machine.  For  the  fund 
of  capital  is  represented  by  many  other  concrete  commodities 
besides  machines.  Total  interest  is  always  total  net  rent; 
that  is,  the  total  net  product  of  the  entire  fund  of  capital  must 
be  the  same  as  the  total  product  of  the  aggregate  of  all  the 
individual  pieces  of  capital.  But  this  is  very  different  from 
saying  that  the  interest  on  a  thousand  dollars  is  the  same  as 
the  annual  gross  rent  of  a  particular  machine  costing  a  thousand 
dollars. 

This  is  due  to  the  fact  that  rents  and  capital  values  of  single 
commodities  are  as  different  as  the  commodities  themselves. 
They  run  through  the  whole  gamut  of  value  from  zero  to  well- 
nigh  incalculable  sums.  Capital,  as  a  fund,  on  the  other  hand, 
is  a  unit.  Pieces  of  capital  are  heterogeneous;  a  fund  of  cap- 
ital is  homogeneous.  There  is  no  rate  of  rents  or  of  capital 
values;  there  is  a  general  rate  of  interest.  Interest  on  a  thou- 
sand dollars  may  be  fifty  dollars;  a  machine  and  a  horse  may 
cost  a  thousand  dollars,  and  yet  they  may  rent  for  very  differ- 
ent sums  because  of  their  unequal  durability.  If  all  concrete 
units  of  capital  were  alike  in  productivity  and  if  there  was  no 
question  of  durability,  rent  would  always  be  the  same  as  interest. 
It  is  precisely  because  individual  pieces  of  capital  are  not  alike 
that  rent  differs  from  interest,  although  total  rent  must  always 
equal  total  interest. 

The  statement  that  capital  as  a  fund  is  homogeneous  must 
not  be  misunderstood.  Two  identical  pieces  of  capital,  let  us 
say  two  machines,  may  yield  very  different  products,  because 
the  one  may  be  carefully  looked  after  and  the  other  badly 
neglected.  In  the  same  way  equal  amounts  of  capital  may  be 
loaned  to  two  persons,  one  of  whom  may  be  expected  to  repay 


396  Interest  [§  165 

promptly,  while  in  the  other  case  there  may  be  a  risk.  Just 
as  the  two  machines,  although  technically  the  same,  are  econom- 
ically different,  so  the  two  individual  sums  of  capital,  although 
in  one  sense  homogeneous  because  reduced  to  a  fund  of  value, 
are  yet  economically  and  from  the  point  of  view  of  the  lender 
different  productive  instruments  or  income-bearing  agents. 
Actual  interest  rates  on  loans  therefore  fluctuate  with  the  degree 
of  security  and  the  probability  of  repayment.  Interest  rates 
on  land  vary,  for  instance,  with  the  ratio  of  the  loan  to  the 
property.  In  New  York  City  recently  a  loan  equal  to  one-half 
the  assessed  value  of  the  land  could  be  secured  for  four  per 
cent,  a  somewhat  larger  sum  for  four  and  a  half  per  cent,  and 
about  three-quarters  of  the  value  for  five  per  cent.  The  rate  of 
interest  on  bonds  varies  from  slightly  over  two  per  cent  on 
government  loans  to  five,  six  or  seven  per  cent  on  local  or 
industrial  paper  of  more  doubtful  security.  When  we  speak 
of  the  fund  of  capital  as  homogeneous,  we  refer  to  the  identity  of 
potential  use,  not  to  the  conditions  of  repayment.  A  study  of 
the  normal  rate  of  interest  is  a  study  of  natural  interest,  or  the 
returns  from  the  use  of  capital  on  the  assumption  of  complete 
mobility,  free  competition  and  the  presence  of  the  economic 
motive.  The  fact  that  a  person  who  has  borrowed  the  capital 
and  pocketed  its  earnings  chooses  not  to  repay  all  of  it,  will 
affect  the  rate  at  which  that  particular  person  or  other  persons 
of  his  class  can  in  future  secure  a  loan,  but  will  leave  untouched 
the  normal  rate  of  interest  on  good  security.  Risk  causes  a 
fluctuation  from  the  normal  rate  of  interest;  it  does  not  affect 
the  normal  rate  itself  which  is  paid  on  capital  when  there  is 
virtually  no  risk.  So  far,  of  course,  as  there  is  an  element  of 
risk  in  all  human  transactions,  the  cost  of  this  minimal  risk 
must  be  included  in  the  rate  of  interest.  But  in  ordinary 
"gilt-edge"  loans  this  may  be  practically  disregarded. 

Interest  rates  not  only  fluctuate  on  loans  to  different  individ- 
uals or  classes,  but  vary  in  different  sections  or  parts  of  the 
same  country.     This,  is,  however,  so  obviously  an  illustration 


§  165]  Nature  of  Interest  397 

of  the  fact  that  we  are  dealing  v.ith  different  markets  as  to  need 
no  further  elaboration.  A  study  of  interest  rates,  Hke  that  of 
all  other  cases  of  value,  refers  to  conditions  in  a  given  market. 
If  the  study  discloses  the  general  principles  of  value  in  a  market, 
it  will  be  adequate  to  explain  the  relative  variations  in  different 
markets. 

Another  seeming  exception  to  the  principle  that  interest  is 
the  earnings  of  a  homogeneous  fund  of  capital  is  afforded  by 
interest  rates  on  "call  loans"  in  financial  centres,  —  that  is,  on 
loans  which  may  be  called  or  terminated  at  will,  as  opposed 
to  ordinary  time  loans.  The  general  rate  of  interest  in  New 
York  may  be  four  or  five  per  cent,  but  in  the  parlance  of  Wall 
Street  "money  may  be  worth"  on  a  given  day  only  one  or  two 
per  cent  when  "it  is  a  drug  on  the  market,"  and  may  at  another 
time  "be  so  tight"  as  to  command  an  interest  rate  of  several 
per  cent  a  week  or  several  hundred  per  cent  a  year.  The  ex- 
planation is  not  difficult.  Interest  in  general  is  paid  for  a  fund 
of  capital,  because  that  fund  ultimately  represents  some  con- 
crete pieces  of  capital  that  afford  a  service.  The  manufac- 
turer invests  the  capital  in  new  machines  or  buildings,  the 
merchant  in  new  facilities  of  transfer,  the  farmer  in  more  land 
or  better  implements.  In  the  case  of  Wall  Street,  however, 
what  is  wanted  is  not  capital  for  technical  production,  but 
capital  in  the  form  of  liquid  assets  or  a  disposable  surplus  of 
cash  to  meet  current  liabilities.  The  ordinary  rate  of  interest 
depends  upon  the  demand  and  supply  of  capital  for  productive 
purposes;  the  rate  of  interest  on  call  loans  depends  on  the 
demand  and  supply  of  the  fluctuating  mass  of  loanable  funds 
which  are  on  the  instant  convertible  into  cash.  The  rate  of 
interest  on  call  loans  may  be  high  when  the  general  rate  of 
interest  is  low.  In  the  case  of  call  loans  the  payment  is  for 
the  temporary  use  of  the  money  considered  as  a  commodity 
in  itself;  in  the  case  of  ordinary  loans  the  payment  is  for  the 
use  of  an  aliquot  part  of  the  social  capital  of  the  community. 
For  a  fuller  treatment  of  this  point  see  §  207. 


398  Interest  [§  166 

166.   Interest  and  Forbearance 

We  have  learned  that  the  real  value  of  all  things  consists  in 
their  rents  or  actual  uses  and  that  the  fundamental  aspect  of 
value  is  rental  value.  We  have  also  learned  that  rental  values 
are  transmuted  into  capital  values,  and  that  capital  value 
depends  upon  a  succession  of  anticipated  income  or  rental 
values.  Finally,  we  have  learned  that  this  process  of  capitali- 
zation, or  of  estimating  the  present  worth  of  a  succession  of 
future  uses,  depends  upon  the  fact  that  men  habitually  put  a 
lower  present  estimate  on  future  uses  than  on  present  uses. 
Interest  thus  involves  a  discounting  of  the  future  and  is  a  nat- 
ural phenomenon  because  it  represents  a  natural  discount.  It 
corresponds  to  the  difference  in  the  time  utility  of  things,  as 
actual  rents  or  usufructs  correspond  to  difference  in  material 
utility. 

In  the  case  of  more  or  less  durable  articles  of  consumption, 
we  can  postpone  or  wait  for  each  use  or  service  as  it  recurs; 
or  we  can  dispose  now  of  all  its  expected  future  uses  by  selling 
it  outright.  Obviously  there  is  a  disadvantage  in  waiting, 
because  the  present  satisfactions  that  we  could  buy  are  more 
keenly  appreciated  than  these  future  satisfactions.  In  paying 
us  a  capital  sum,  therefore,  the  purchasers  or  actual  consumers 
will  insist  on  a  reward  for  their  forbearance.  We  can  invest 
the  money  in  something  that  can  be  consumed  at  once;  they 
must  wait  for  each  recurring  service  or  use  of  the  commodity 
now  in  their  possession.  As  the  future  changes  into  the  pres- 
ent, each  use  of  the  commodity  will  afford  them  a  definite 
satisfaction;  but  at  the  present  moment  the  actual  value  of 
each  anticipated  future  use  is  somewhat  smaller  than  will  be 
the  value  of  that  use  when  realized.  This  difference  or  discount 
is  the  reward  for  forbearance,  that  is,  for  postponing  present 
satisfactions. 

Articles  of  consumption,  however,  must  be  replaced.  A 
stock    of    consumption    goods    can    continue   or    increase   only 


§  i66]  Forbearance  399 

through  the  means  of  production  goods.  If  thmgs  are  used 
for  productive  purposes,  their  capital  value  must  be  explained 
in  the  same  way  as  that  of  consumption  goods.  The  person 
who  has  created  a  piece  of  capital  must  be  rewarded  for  his 
waiting.  Instead  of  consuming  everything  now,  he  prefers  to 
put  a  part  of  his  energies  into  producing  something  which 
will  last,  and  will  help  him  in  the  future.  He  postpones  his 
gratifications,  he  waits  for  the  future  rents  or  earnings  of  this 
thing  that  now  has  a  capital  value,  because  it  capitalizes  the 
anticipated  rents  or  earnings.  As  these  future  earnings  become 
with  the  lapse  of  time  present  earnings,  they  acquire  a  greater 
value,  —  greater  by  the  amount  that  a  present  satisfaction  ex- 
ceeds a  future  satisfaction.  When  a  man  puts  his  capital  into 
a  savings  bank  or  into  a  business  or  into  a  concrete  commodity, 
the  aggregate  of  earnings  or  services  as  they  mature  exceed 
the  present  capitalized  worth  of  those  earnings.  The  capital, 
as  it  is  said,  will  earn  (in  the  future)  a  surplus  over  its  present 
(capitalized)  value.  If  he  keeps  the  capital,  this  surplus  will 
accrue  to  him;  if  he  loans  it,  the  borrower  must  pay  him  the 
surplus  which  will  have  been  earned  by  the  time  that  the  capital 
is  repaid.  If  we  own  a  boat  and  rent  it  out,  it  may  bring  in  $150 
before  it  is  finally  discarded  after  a  dozen  years;  but  if  we  sell 
it  now  it  may  fetch  only  $80.  The  difference,  or  $70,  is  the 
interest  or  surplus  reward  which  accrues  to  us  if  we  wait  for  the 
future  earnings  to  come  in.  As  the  future  uses  or  earnings 
ripen  into  present  earnings,  they  acquire  an  enhanced  value. 

To  say,  however,  that  interest  is  the  reward  of  forbearance 
does  not  suffice.  We  must  remember  that  all  price  depends 
on  marginal  utility.  We  are  always  comparing  one  kind  of 
enjoyment  with  another,  and  the  increments  of  satisfaction 
diminish  with  the  supply  until  we  reach  a  certain  point  or 
margin  where  the  increment  of  satisfaction  aft'orded  by  a  given 
service  or  commodity  is  overtaken  by  that  afforded  by  another. 
When,  therefore,  we  compare  present  with  future  satisfactions, 
we   are   really   comparing   marginal   increments   of   enjoyment. 


400  Interest  [§  i66 

Our  present  estimate  of  each  successive  future  use  of  a  com- 
modity diminishes  as  that  use  recedes  into  the  future;  but  the 
extent  to  which  we  are  willing  to  refrain  from  present  con- 
sumption depends  on  the  relative  amount  at  our  disposal.  If 
we  have  a  large  quantity  of  a  commodity  or  a  large  sum  of 
money  with  which  to  buy  it,  we  can  consume  only  a  small 
portion  now,  and  may  be  quite  ready  to  lay  by  the  rest  because 
it  does  not  involve  any  perceptible  sacrifice.  With  every 
diminution  in  the  amount  at  our  disposal,  however,  the  greater 
wiU  be  the  importance  which  we  attach  to  present  satisfactions, 
and  the  more  remote  will  appear  the  advantage  of  saving  for 
the  future.  Finally,  a  point  will  be  reached  where  these  two 
considerations  balance  each  other,  and  where  we  shall  be  on 
the  margin  of  doubt  whether  to  save  or  to  spend.  Beyond 
that  point  we  shall  surely  not  save,  because  we  secure  more 
satisfaction  from  present  enjoyment. 

When,  therefore,  we  say  that  interest  is  the  result  of  forbear- 
ance, we  really  mean  that  interest  is  the  result  of  marginal 
forbearance,  or  forbearance  at  the  margin.  The  disadvantage 
of  waiting,  which  is  the  essence  of  interest,  is  the  disadvantage 
of  waiting  at  the  point  w'here  we  get  ready  to  substitute  one 
kind  of  enjoyment  for  another.  This  marginal  point  will 
indeed  be  a  different  one  for  the  rich  and  the  poor,  for  the  spend- 
thrift and  the  miser;  but  this  difference  will  affect  the  rate  of 
interest  as  little  as  the  relative  wealth  of  the  purchaser  affects 
the  price  of  wheat  on  the  exchange.  The  value  of  wheat  is  the 
expression  of  its  marginal  utility  to  the  wheat-using  group; 
the  interest  on  capital  corresponds  to  the  difference  in  the 
marginal  estimates  of  present  and  future  uses  for  the  whole 
capital-using  group.     \'alue  in  the  market  is  social  value  (§  74). 

Interest,  then,  is  not  simply  the  discount  between  present  and 
future  enjoyments  in  general.  There  would  indeed  be  no 
capital  if  there  were  no  saving,  but  all  sa\ang  does  not  involve 
a  sacrifice  or  disadvantage.  People  would  save  something 
even  if  there  were  no  interest.     A  prudent   man  knows  that 


§  167]  Interest  and  Productivity  401 

he  will  need  something  for  a  rainy  day;  a  far-sighted  man 
may  even  believe  that  the  future  social  demand  for  a  commod- 
ity or  service  will  grow,  and  he  would  then  save  or  accumulate 
the  particular  capital  even  if  there  was  no  reward  in  the  form  of 
interest.  For  if  he  is  right,  it  will  be  worth  more  to  him  in  the 
future  than  it  is  at  present.  But  when  a  man  saves  or  accumu- 
lates capital,  he  would,  if  there  were  no  interest,  soon  reach  a 
point  where  his  gains  from  accumulation  would  be  overtaken  by 
his  loss  in  foregoing  present  enjoyments  for  future  satisfactions. 
This  would  be  the  margin  or  final  point  where  he  would  stop 
saving  or  capitalizing.  Interest  therefore  is  the  discount 
between  present  and  future  marginal  increments  of  enjoyment; 
that  is,  interest  is  the  measure  of  the  marginal  disadvantage 
of  forbearance. 

jMoreover,  since  at  this  margin  men  are  constantly  compar- 
ing the  service  of  one  commodity  with  that  of  another,  interest 
is  the  return  for  awaiting  not  simply  the  future  service  of  some 
particular  piece  of  capital,  but  that  of  any  other  piece  of  capi- 
tal which  may  be  substituted  for  it.  In  other  words,  the  rate 
of  interest  depends  on  the  difference  between  the  actual  esti- 
mate of  the  present  and  that  of  the  future  services  of  the  whole 
mass  of  capital  at  the  margin,  that  is,  of  the  marginal  increments 
of  the  entirety  of  capital. 

167.   Interest  and  Productivity 

It  is  obvious  that  unless  a  commodity  afforded  some  services 
or  earnings  there  would  be  no  use  in  waiting  and  no  advantage 
in  forbearance.  Instead  of  centering  our  attention  upon  the 
forbearance  we  may  equally  well  turn  our  consideration  to  the 
future  services  which  capital  will  yield.  In  lieu  of  looking  at  the 
problem  from  the  point  of  view  of  waiting  for  the  service,  we  may 
approach  it  from  that  of  the  capital  which  affords  the  service. 
As  soon  as  we  do  this,  we  face  the  problem  of  productivity. 

Particular  pieces  of  capital  are  undoubtedly  productive.  An 
axe  enables  us  to  secure  a  greater  result  than  if  we  used  our 
26 


4-0  2  Interest  [§  167 

hands.  A  machine  utilized  by  a  laborer  produces  more  than 
the  labor  alone  could  produce.  If  particular  pieces  of  capital 
are  productive,  capital  as  a  whole  must  be  productive.  If  the 
commodity  no  longer  affords  a  service,  it  will  lose  its  value  as 
a  piece  of  capital,  that  is,  it  will  no  longer  be  capital.  Con- 
versely, capital  will  be  accumulated  because  of  the  earnings  to 
be  derived  therefrom.  When  we  speak  of  capital,  we  inevi- 
tably think  of  the  earnings  of  capital. 

Owing  to  the  law  of  diminishing  returns,  there  is  a  limit  to 
the  profitable  use  of  particular  pieces  of  capital.  If  a  given 
force  of  workmen  had  previously  used  only  their  hands,  and  if 
a  machine  is  introduced,  like  a  loom,  the  product  will  be  at 
once  increased.  If  the  single  loom  does  not  occupy  all  the 
time  of  the  workman,  more  will  be  introduced,  until  with  say 
ten  looms  each  workman  is  fully  employed.  The  addition  of 
an  eleventh  loom  will  still  increase  the  product,  but  the  addi- 
tion will  not  be  so  great  as  before  the  point  of  maximum  utili- 
zation had  been  reached,  because  the  workman  cannot  tend 
each  loom  so  carefully.  A  twelfth  and  thirteenth  loom  wiU 
add  continually  smaller  products,  until  finally  an  additional 
loom  will  add  nothing  at  all.  Now,  since  every  loom  is  as  good 
as  the  other,  the  earnings  or  the  productivity  of  each  is  at  any 
given  time  measured  by  that  of  the  last  or  marginal  loom  em- 
ployed. If  there  are  ten  looms,  the  contribution  of  each  is 
equal  to  that  of  the  tenth;  if  there  are  thirteen,  the  contri- 
bution of  each  is  equal  to  that  of  the  thirteenth.  The  earnings 
of  the  marginal  loom,  that  is,  its  additional  contribution  to  the 
product,  is  its  rent,  and  if  the  looms  are  hired  from  the  owner, 
the  money  rent  paid  to  him  for  each  loom  will  be  equivalent 
to  the  marginal  earnings,  that  is,  the  earnings  or  contribution 
to  the  product  of  the  marginal  loom.  If  tTie  entire  capital  of 
the  community  consisted  of  looms,  the  annual  product  of  the 
looms  would  be  the  gross  return  of  the  capital  invested  in  looms; 
and  this  product,  less  the  cost  of  repairing  and  replacement, 
would  be  at  once  the  net  rent  and  the  interest. 


§  167]  Interest  and  Productivity  403 

'J'hc  total  tapilal  of  a  community,  liowcvcr,  is  composed  of 
olher  things  than  looms.  Capital  as  a  whole  includes  all  the 
concrete  pieces  of  wealth.  When  we  borrow  a  thousand  dol- 
lars, we  secure  the  opportunity  of  embodying  that  sum  in  any 
individual  piece  of  concrete  capital.  That  sum  has  a  value 
because  it  is  productive,  in  the  sense  that  it  can  at  once  be 
incorporated  into  something  that  yields  a  product.  Since  indi- 
viduals are  constantly  competing  for  the  privilege  and  are  substi- 
tuting different  embodiments  of  that  fund  of  capital  according 
to  their  estimate  of  the  returns  to  be  derived,  it  is  clear  that 
at  any  moment  the  productivity  of  the  entire  mass  of  capital 
in  existence  is  measured  by  that  of  the  particular  piece  of  capital 
at  the  margin  of  employment.  It  may  be  a  loom  or  anything 
else.  Productivity  of  the  fund  or  aggregate  of  capital  means 
marginal  productivity. 

This  margin  of  employment,  however,  is  not  simply  the 
margin  of  indifference  as  between  various  pieces  or  increments 
of  capital;  it  is  also  a  margin  of'  indifference  as  between  the 
various  productive  factors  in  general.  Owing  to  the  same 
principle  of  diminishing  returns,  the  United  States  Steel  Cor- 
poration must  continually  consider  whether  it  pays  better  to 
add  another  machine  in  a  given  mill  or  to  burn  more  coal  in 
order  to  speed  the  machines  faster;  whether  it  is  more  advan- 
tageous to  put  additional  capital  into  that  particular  mill  or  into 
the  steamers  which  transport  the  product  to  the  market.  In 
the  same  way  they  must  consider  whether  it  pays  better  to 
crowd  more  machines  into  the  same  mill  or  to  acquire  more 
land  and  build  a  new  mill.  Finally,  they  must  consider  whether 
it  pays  better  to  increase  the  labor  force  for  the  purpose  of 
getting  more  work  out  of  the  same  machines,  or  to  increase 
the  number  of  machines.  Every  practical  business  man  realizes 
that  there  is  such  a  margin  of  indifference,  beyond  which  an 
additional  application  of  capital  will  not  yield  as  great  returns 
as  an  additional  application  of  labor,  or  vice  versa. 

What   is  true  of   the  individual  is   equally   true  of  society. 


404  Interest  f§  167 

The  tolal  capiUil  in  a  given  nuirkcL  is  constantly  competing 
witli  the  total  supply  of  other  productive  agents.  The  margin 
of  employment  which  tells  in  the  determination  of  the  normal 
rate  of  interest  is  a  social  margin.  All  the  individual  pieces  of 
capital  are  reduced  to  terms  of  money,  and  the  fund  of  capital 
in  any  market  is  the  capital  value  of  all  the  single  pieces  of 
capital.  The  marginal  productivity  of  this  fund  of  capital  is 
the  earning  capacity  of  the  increment  embodied  in  the  particular 
piece  of  capital  employed  at  the  margin.  That  particular 
increment  of  capital  will  yield  a  certain  return,  and  that  return 
or  addition  to  the  capital  constitutes  interest. 

When  we  have  free  competition  and  complete  mobility  of 
capital,  any  increment  can  earn  only  as  much  as  the  marginal 
increment,  for,  since  they  are  interchangeable,  any  increment 
at  a  given  time  may  be  considered  the  last  or  final  one.  In- 
terest is  the  addition  to  itself  which  the  capital  in  a  given  market 
earns  at  the  point  of  marginal  utilization.  Interest,  in  other 
words,  is  the  product  of  the  marginal  increment  of  capital. 

It  makes,  therefore,  really  no  difference  whether  we  say 
that  interest  is  the  measure  of  marginal  productivity  or  the 
measure  of  marginal  forbearance.  They  are  two  ways  of  stating 
the  same  fact,  just  as  we  know  that  the  value  of  all  things  may 
be  expressed  in  terms  of  marginal  utility  or  of  marginal  sacri- 
fice. When  we  speak  of  the  productivity  of  capital,  we  think 
of  utility;  when  we  speak  of  forbearance,  we  think  of  sacrifice. 
Interest,  like  all  value,  may  be  explained  in  terms  of  one  or  of 
the  other,  for  marginal  increments  of  utility  and  of  sacrifice 
tend  to  be  equal.  When,  however,  we  say  that  the  marginal 
increment  of  capital  employed  at  any  given  moment  yields  a 
certain  return,  we  must  not  forget  that  in  a  deeper  sense  it  is 
not  the  piece  of  capital  which  creates  the  product  or  interest, 
but  that  it  is  the  product  or  interest  which  is  responsible  for 
the  capital.  Capital  value  is  the  reflex  of  the  value  of  the 
anticipated  services.     Capital  is  capitalized  income. 


§  I 


68]  Course  405 


168.    Course  of  Interest 

Since  interest  is  the  measure  of  marginal  productivity  and 
marginal  forbearance,  the  actual  rate  of  interest  depends  on  the 
location  of  the  margin.  Like  every  other  margin,  this  is  a 
result  of  an  equilibrium  or  balancing  of  economic  forces. 

It  is  obvious  that  in  early  stages  of  development  the  margin 
is  high.  There  is  a  great  scarcity  of  capital;  and  it  assumes 
the  form  chiefly  of  the  rudest  kinds  of  implements  which  cost 
but  little  time  and  labor  to  create.  The  margin  of  indifference 
is  a  high  one,  and  therefore  the  marginal  productivity  of  capital, 
that  is,  the  rate  of  interest,  is  high. 

As  capital  accumulates,  the  margin  recedes.  While  the 
growth  of  capital  augments  prosperity,  the  product  ascribable 
to  each  individual  piece  of  additional  capital  is  smaller  than 
before.  At  the  new  margin  where  men  are  debating  whether 
to  spend  or  to  save,  whether  to  work  for  current  needs  or  to 
work  harder  for  future  needs,  the  same  result  can  be  secured 
only  by  greater  labor.  The  marginal  piece  of  capital,  in  other 
words,  has  a  lower  productivity.  The  rate  of  interest  falls, 
because  the  capital  employed  at  the  margin  produces  less  for 
itself,  that  is,  adds  less  to  itself.  The  addition  to  itself  at  the 
margin  is  the  rate  of  interest. 

In  so  far,  hence,  as  progress  means  the  continual  multipli- 
cation and  improvement  of  capital,  it  implies  a  steady  reduction 
in  the  rate  of  interest.  Capital  develops  not  only  in  quantity, 
but  in  quality.  We  have  not  only  more  pieces  of  capital,  but 
better  ones.  The  clumsy  tools  are  replaced  by  fine  machines, 
the  log  house  gives  way  to  the  sky-scraper,  the  wheelbarrow  to 
the  electric  locomotive.  The  total  product,  that  is,  the  aggre- 
gate wealth  of  the  community,  augments,  and  there  is  such  an 
increase  in  the  number  of  increments  of  capital  that  at  the 
margin,  where  the  final  increment  of  capital  is  employed,  the 
selling  value  of  its  product  will  be  less  than  before.  Prosperity 
depends  upon  total  product,  but  value  depends  upon  marginal 


4o6  Interest  [§  i68 

prodiuL;  the  inar^^inal  product  of  capital  decreases,  while  the 
total  i)ro(luct  of  all  the  capital  increases.  The  rate  of  interest 
falls  because  the  margin  of  employment  falls;  hut  as  the  margin 
falls,  the  quantity  of  capital  grows,  its  quality  improves  and 
wealth  increases. 

According  to  the  recent  researches  of  Billeter,  the  normal 
rate  of  interest  on  good  security  during  the  period  of  greatest 
prosperity  in  Athens  was  about  12  per  cent;  while  in  Rome 
at  the  close  of  the  republic  it  had  fallen  to  between  4  and  6 
per  cent.  Starting  in  again  during  the  early  middle  ages  at 
a  rate  of  20  per  cent  and  15  per  cent,  it  gradually  fell,  until  in 
the  great  financial  centres  of  Holland  toward  the  close  of  the 
eighteenth  century  it  reached  a  rate  of  between  2  per  cent 
and  3  per  cent.  Since  then  the  rate  has  again  risen,  for  reasons 
to  be  mentioned  in  a  moment. 

It  would  be  a  mistake  to  assume  that  the  margin  is  fixed 
simply  by  the  alternative  returns  from  land.  It  is  true  that 
where  land  is  abundant,  and  land  rent  therefore  low,  the  rate 
of  interest  is  high.  It  is  equally  true  that  one  of  the  causes 
responsible  for  the  rise  of  interest  has  been  the  opening  up  of 
vast  stretches  of  cheap  land  in  the  New  World.  As  the  margin 
of  cultivation  moved  outward,  the  same  piece  of  capital  applied 
to  the  land  yielded  larger  results;  that  is,  the  margin  of  the 
productivity  of  capital  moved  upward,  and  the  rate  of  interest 
moved  with  it.  But  changes  in  the  productivity  of  land  are  not 
the  sole  factor  in  affecting  the  productivity  of,  and  therefore 
the  demand  for,  capital.  If  labor  should  become  less  costly,  the 
margin  would  also  move  up.  Just  as  in  the  preceding  case 
a  unit  of  capital  would  produce  more  when  applied  to  a  given 
quantity  of  less  expensive  land,  so  now  a  unit  of  capital  would 
produce  more  when  used  in  conjunction  with  a  given  quantity 
of  less  expensive  labor.  The  only  difference  between  the  two 
cases  is  that  the  lower  cost  of  land  would  mean  a  lower  land 
rent,  while  the  lower  cost  of  labor  might  mean  either  lower 
wages  or,  when  lower  cost  is  due  to  greater  efficiency,  higher 


§  169]  Tendency  to  a  Minimum  407 

wages.  During  the  past  century,  for  instance,  one  of  the  reasons 
miUtating  against  a  fall  in  the  rate  of  interest  has  been  the  in- 
creased productivity  of  capital  due  to  the  lower  relative  cost 
of  labor,  whether  the  new  capital  has  been  used  in  Java  with 
the  low-wage  peasant,  or  in  America  with  the  high-wage  factory 
hand.  The  consideration  of  wages,  however,  must  be  deferred 
to  the  next  chapter. 

The  location  of  the  margin  may  be  affected  not  only  by 
changes  in  the  relative  productivity  of  other  factors  of  pro- 
duction, but  by  changes  affecting  capital  itself.  Continual 
improvements  in  capital  undoubtedly  increase  general  produc- 
tivity, but  as  qualitative  improvements  in  pieces  of  capital  are 
subject  to  the  law  of  diminishing  returns,  their  introduction  is 
normally  accompanied  by  a  decline  in  the  rate  of  interest.  In 
Japan  as  in  the  Canadian  Northwest  interest  rates  are  rapidly 
falling,  although  fresh  land  is  scarce  in  the  former,  and  abun- 
dant in  the  latter,  country.  In  the  same  way  the  moving  force 
may  come  from  the  side  of  demand  or  forbearance  rather  than 
of  supply  or  productivity.  The  general  state  of  society  may 
affect  the  readiness  to  postpone  present  for  future  gratifications. 
When  the  Filipinos  complain  of  a  scarcity  of  capital,  they  forget 
that  the  social  and  political  conditions  have  been  such  as  to 
discourage  the  sense  of  saving.  The  true  education  for  the 
Filipino,  as  it  is  for  the  Negro,  is  to  inculcate  such  habits  of 
mind  as  to  augment  the  readiness  to  forego  present  satisfactions. 
Whatever  does  this  lowers  the  margin  and  leads  to  a  fall  in  the 
rate  of  interest. 

169.   Tendency  of  Interest  to  a  Minimum 

A  gradual  decrease  in  the  rate  of  interest  is  normal  as  well 
as  beneficial  to  the  community.  It  lowers  cost  and  enhances 
prosperity.  It  would,  however,  be  an  error  to  conclude  that 
this  tendency  is  constant,  and  tliat  the  interest  rate  will  dis- 
appear or  even  reach  a  bare  minimum.  For,  as  the  rate  ap- 
proaches a  certain  low  point,  it  sets  in  motion  forces  to  prevent 


4o8  Interest  [§  169 

any  further  reduction.  This  can  be  approached  from  two  points 
of  view. 

The  first  consideration  is  the  unlimited  potential  capacity  of 
modern  society  to  utilize  capital.  A  low  interest  rate,  say 
three  or  four  per  cent,  is  possible  only  in  a  community  amply 
supplied  with  capital.  In  such  a  complex  society  the  demand 
for  a  greater  control  of  the  conveniences  of  life  is  virtually  in- 
satiable, and  individuals  and  government  alike  will  be  deterred 
from  entering  upon  ever  larger  schemes  of  permanent  im- 
provement and  investment  only  by  the  consideration  of  cost. 
If  the  rate  of  interest  should  conceivably  fall  so  low  that  the  cost 
of  capital  might  be  neglected,  it  would  lead  to  a  well-nigh  in- 
calculable multiplication  of  durable  commodities.  Every  city 
would  be  pierced  by  innumerable  subways,  railroads  would  be 
more  common  than  country  paths,  laborers  would  live  in  pal- 
aces and  all  other  fairy  flights  of  the  imagination  would  be 
realized.  This  very  statement  is  sufficient  to  show  its  ab- 
surdity. Capital  could  be  costless  only  if  the  concrete  pieces  of 
capital  cost  nothing.  But  we  know  that  while  progress  is  con- 
stantly reducing  the  cost  of  some  things,  the  fall  in  price  en- 
genders a  production  of  new  things,  previously  non-existent. 
As  long  as  human  labor  involves  some  sacrifice  and  human 
demands  are  illimitable,  there  will  always  be  some  things  that 
cost  labor. 

If  individual  durable  things,  however,  cost  something,  capi- 
tal as  a  whole  can  never  become  costless,  like  air  or  water. 
The  reduction  in  the  cost  of  some  forms  of  capital  will  at  a 
certain  point  be  balanced  by  the  rise  in  the  cost  of  new  forms 
of  capital  which  formerly  did  not  exist  and  therefore  had  no 
cost.  As  long  as  invention  keeps  ahead  of  demand,  cost  will 
fall;  but  with  every  reduction  in  cost  demand  increases,  and 
when  demand  can  no  longer  be  satisfied  by  an  increase  in  the 
supply,  when,  in  other  words,  the  law  of  diminishing  returns  has 
made  its  influence  felt,  any  serious  reduction  in  the  aggregate 
cost  of  capital  is  impossible.     Putting  it  in  another  way,  we 


§  169]  Tendency  to  a  Minimum  409 

may  say  that  after  a  certain  point  has  been  reached  any  addi- 
tional decline  in  the  interest  rate  will  mean  a  more  than  pro- 
portionate increase  in  the  demand  for  capital,  and  this  aug- 
mented demand  which  cannot  be  met  by  any  corresponding 
decrease  in  cost  will  prevent  any  further  reduction  in  the  rate. 
As  capital  becomes  more  abundant,  its  marginal  productivity 
in  terms  of  value  will  decrease,  but  the  decrease  itself  will  be 
arrested  at  a  certain  point.  So  far  as  experience  seems  to  show, 
this  point  means  a  rate  of  between  2  per  cent  and  3  per  cent. 

The  same  result  can  be  reached  by  approaching  the  problem 
from  the  other  side,  that  of  marginal  forbearance.  The  readi- 
ness to  accumulate  capital  depends  on  the  comparison  between 
present  and  future  estimates.  The  accumulations  of  a  very 
rich  man  as  well  as  of  a  very  poor  man  are  apt  to  be  only  slightly 
affected  by  an  unduly  low  rate  of  interest,  —  the  very  rich 
man  because  he  cannot  well  help  accumulating,  and  the  poor 
man  because  he  has  so  narrow  a  margin  for  saving  of  any  kind. 
In  the  case  of  the  ordinary  man,  however,  who  is  really  respon- 
sible for  the  growth  of  capital,  the  matter  is  different.  It  is 
not  utterly  arbitrary  to  assume  that  a  man  in  moderate  cir- 
cumstances will  commonly  be  willing  to  restrict  his  expenses 
and  lay  aside  annually  a  sum  about  equal  to  that  which  he 
expects  to  enjoy  as  income  in  the  future.  The  time  required 
for  accumulating  a  capital  which  will  yield  such  an  income 
will  be,  at  6  per  cent  interest,  12  years;  at  3  per  cent,  24  years; 
at  2  per  cent,  35  years;  at  i^  per  cent,  47  years;  at  i  per  cent, 
70  years. ^  If  the  interest  rate  falls  from  6  per  cent  to  3  per 
cent,  the  reward,  even  if  smaller,  will  still  be  worth  while,  and 
in  order  to  provide  himself  with  an  adequate  income  the  indi- 
vidual may  accumulate  a  larger  capital  than  before.  But  if 
the  rate  falls  to  i|  per  cent  he  will  seek  to  secure  the  future 
income  in  some  other  way  without  accumulating  a  capital. 
Nowadays  he  would  go  to  an  insurance  company  and  buy  an 
annuity,  and  even  if  he  wishes  to  purchase  an  annuity  to  last 
1  Cassel,  The  Nature  and  Necessity  of  Interest,  p.  146. 


41  o  Interest  [§  170 

long  enough  to  include  the  life  of  his  children,  the  advantage 
of  an  annuity  which  at  a  high  rate  of  interest  is  exceedingly  slight 
becomes  more  and  more  substantial  as  the  rate  of  interest  de- 
clines. With  a  change  in  the  above  figures,  the  conclusions 
will  of  course  vary;  but  in  any  event,  taking  the  practice  of 
the  ordinary  man,  ii  is  susceptible  of  a  reasonably  legitimate 
calculation  that  the  rate  of  interest  cannot  fall  much  below 
2  per  cent,  because  otherwise  the  desire  to  accumulate  would 
be  effectually  checked.  While  precise  figures  are  manifestly 
impossible,  it  seems  that  the  margin  which  fixes  the  rate  of  in- 
terest thus  stands  in  a  close  relation  to  the  length  of  human 
life.  If  human  longevity  were  to  increase,  the  possible  mini- 
mum in  the  rate  of  interest  might  be  far  lower  than  is  likely 
to  be  the  case  under  present  conditions. 

170.   Regulation   of  Interest 

Interest,  therefore,  like  rent,  is  a  natural  phenomenon,  which 
must  exist  wherever  private  property  in  durable  quantities  is 
found.  Yet  until  recent  times  government  has  always  attempted 
to  restrict  the  rate  of  interest. 

At  the  outset,  when  the  function  of  capital  was  not  compre- 
hended, interest  was  considered  a  return  for  the  use  of  money. 
Since  the  chief  function  of  money  was  held  to  be  its  use  as  a 
medium  of  exchange,  any  compensation,  other  than  the  trans- 
fer of  the  thing  exchanged,  was  deemed  unjustifiable.  The 
price  of  the  use  —  the  pretium  usus  —  was  usury,  usiira,  and 
wholly  indefensible.  Usury  and  interest  were  synonymous, 
because  the  use  for  which  a  price  was  paid  involved  an  interval 
of  time  "between"  {interest)  the  loan  and  the  repayment. 
Yet  although  seemingly  unjustifiable,  the  exigencies  of  busi- 
ness life  compelled  the  borrower  to  make  some  payment  if  he 
desired  to  induce  the  lender  to  part  with  his  property.  Public 
opinion  began  to  recognize  the  legitimacy  of  some  moderate 
return  to  the  lender,  primarily  as  a  compensation  for  risk.  The 
wedge  was  gradually  pushed  further  in,  until  a  distinction  was 


§  lyo]  Regulation  of  Interest  41  i 

drawn  between  the  legitimate  return,  now  called  interest,  and 
the  illegitimate  surplus  known  as  usury.  Legislation  no  longer 
prohibited  all  interest,  but  only  excessive  interest.  Yet  the 
legal  rate  of  contract  interest  was  changed  from  time  to  time  as 
the  natural  rate  declined. 

The  development  of  modern  capitalism,  and  the  recognition 
of  the  fact  that  interest  is  paid  for  the  use  of  capital  rather  than 
for-  that  of  the  money  representing  the  capital,  have  led  during 
the  last  half-century  to  the  final  stage,  —  the  abolition  of  usury 
laws.  The  modern  theory  rests  on  the  conviction  that  free- 
dom of  loans  enures  to  the  interest  of  the  borrower  as  well  as 
of  the  community.  To  prevent  the  lender  from  securing  the 
market  rate  is  to  curtail  the  offer  of  capital,  to  restrict  the  pro- 
cess of  accumulation  and  to  increase  the  price,  open  or  secret, 
which  the  borrower  must  ultimately  pay.  With  free  competi- 
tion and  complete  mobility  of  capital,  which  are  the  characteris- 
tic features  of  modern  business  life,  the  lender  will  get  only  what 
his  capital  actually  earns;  the  contract  or  loan  interest  will 
approximate  the  natural  interest.  The  usury  laws  still  found  in 
some  of  the  American  states  are  an  anachronism.^ 

It  must,  however,  not  be  forgotten  that  this  defence  of  free- 
dom in  borrowing  rests  on  the  assumption  which  underUes  all 
liberty,  namely,  relative  equality  in  bargaining.  Where  the 
loans  are  for  immediate  consumption  rather  than  for  productive 
purposes,  and  where  even  in  productive  loans  there  is  such  a 
glaring  discrepancy  between  the  lender  and  the  borrower  that  the 
former  is  able  to  take  an  unfair  advantage  of  the  latter,  the  rea- 
son of  the  rule  falls  away  and  some  degree  of  protection  may  be 
needed  for  the  borrower.     This  is  recognized  in  the  recent  laws 

'  England  abolished  the  usury  law  on  short-time  commercial  paper  in 
1839,  on  all  except  real  estate  loans  in  1850  and  on  all  loans  in  1854. 
In  the  United  States  usury  laws  are  still  found  in  fourteen  states.  In 
New  York  the  penalty  includes  not  only  loss  of  principal  and  interest, 
but  also  a  fine  of  $1,000  and  imprisonment  for  six  months.  This,  how- 
ever, was  so  manifestly  absurd,  that  in  1882  call  loans  of  $5,000  and  over, 
made  on  negotiable  securities,  were  exempted  from  the  law. 


41 2  Interest  [§  170 

of  both  England  and  (lermany,  where  provision  is  made  for  such 
exceptional  cases.  In  the  overwhelming  majority  of  instances, 
however,  modern  business  loans  rest  upon  the  equality  of  busi- 
ness opportunity  and  the  free  competition  of  capital.  Under 
such  conditions  usury  laws  are  futile  and  worse  than  futile,  be- 
cause they  either  tend  to  evasion  or  become  a  drag  on  industry. 


CHAPTER  XXVI 
WAGES 

171.   References 

J.  B.  Clark,  The  Distribution  of  Wealth  (1899),  chs.  vii,  viii,  xii,  xxi, 
and  Essentials  of  Economic  Theory  (1907),  chs.  xiv,  xv,  xvi,  xvii,  and 
xxv;  F.  A.  Fetter,  Principles  (1915),  ch.  xix;  T.  N.  Carver,  Distri- 
bution (1904),  ch.  iv;  A.  ^Marshall,  Principles  (1910),  bk.  vi,  chs.  iii-v; 
F.  A.  Walker,  The  Wages  Question  (1876),  part  1,  ch.  viii,  and  part  2; 
H.  R.  Seager,  Principles  (1913),  ch.  xv;  N.  G.  Pierson,  Principles  (1902), 
part  I,  ch.  vi;  A.  T.  Hadley,  Economics  (1896),  ch.  x;  J.  S.  Nicholson, 
Principles  (1893-1901),  bk.  ii,  chs.  x-xii,  bk.  iv,  ch.  vii;  and  Machinery 
and  Wages  (1892);  H.  L.  Moore,  Laws  of  Wages  (191 1);  W.  S.  Jevons, 
Theory  (1888),  chs.  v,  \'iii;  W.  Smart,  Studies  in  Economics  (1895), 
chs.  i-iv;  J.  A.  Hobson,  Economics  (1900),  ch.  vii;  M.  Pantaleoni, 
Pure  Economics  (1898),  part  3,  ch.  v;  H.  Sidgwick,  Principles  (1883), 
bk.  i,  ch.  viii;  F.  W.  Taussig,  Wages  and  Capital  (1896)  and  Principles 
(1911),  ch.  xlvii;  J.  Davidson,  The  Bargain  Theory  of  Wages  (1898); 
H.  M.  Thompson,  Theory  of  Wages  (1892);  S  and  B.  Webb,  Problems 
of  Modern  Industry  (1907),  ch.  iii;  T.  N.  Carver,  Distribution  of  Wealth 
(1904),  ch.  iv. 

172.   Nature  of  Wages 

Wages  are  the  remuneration  of  labor.  They  are  paid  for 
the  services  of  human  beings,  as  rents  are  paid  for  the  services 
of  things.  When  v^'e  contrast  wages  with  prices,  we  use  the 
latter  term  in  the  sense  of  the  capitalized  value  of  commodities; 
but  if  by  price  we  mean  value  in  the  market,  wages  are  a  price 
just  as  rent  and  interest  are  prices.  The  law  of  wages  must 
be  like  that  of  rent  and  interest,  for  the  law  of  all  price  is  the 
same. 

Wages,  however,  differ  in  some  respects  from  rent  and  in- 
terest. Interest  is  the  price  paid  for  the  use  of  an  aliquot 
part  of  a  homogeneous  fund,  and  the  small  discrepancies  in  the 

413 


414  Wages  [§172 

interest  rate  at  any  given  time  and  place  are  due  to  the  element 
of  risk.  Net  interest  is  always  the  same  in  a  given  market. 
Wages,  however,  vary  with  the  kind  of  labor.  The  wages  of 
the  skilled  workman  are  higher  than  those  of  the  unskilled; 
the  wages  of  the  foreman  shade  into  the  salary  of  the  manager. 
Interest  is  homogeneous,  wages  are  heterogeneous.  On  the 
other  hand,  wages  differ  from  rents.  Rents  vary  from  zero  to 
prodigious  sums:  the  rent  of  a  leased  railroad  may  be  millions 
of  dollars,  the  rent  of  a  worn-out  row-boat  may  be  next  to 
nothing.  The  rents  of  some  things  may  approach  the  vanishing 
point  either  because  the  things  themselves  are  from  the  start 
of  extremely  little  use,  or  because  the  originally  valuable  things 
are  now  fit  only  for  the  scrap  heap  or  the  junkman.  Human 
beings,  on  the  other  hand,  must  live.  The  recompense  of 
labor  must  be  large  enough  to  enable  the  workman  at  least  to 
exist.  Wages  therefore  cannot  fall  below  a  positive  minimum 
which  is  absent  in  the  case  of  commodities.  Moreover,  while 
wages  are  paid  for  mental  as  well  as  for  physical  work,  the 
socially  significant  problem  of  wages  is  that  of  the  manual 
laborers,  and  with  them  the  gradations  in  labor  are  slight  com- 
pared to  those  in  the  great  mass  of  commodities.  Hence,  while 
the  assertion  of  a  general  rate  of  rents  is  unmeaning,  we  do 
speak  of  a  general  rate  of  wages.  It  is  not  a  general  rate  in  the 
sense  of  a  general  or  single  rate  of  interest.  But  it  is  general 
in  the  sense  that  it  varies  comparatively  little  as  between  a 
substantial  minimum  for  the  bottom  grade  and  a  not  very 
much  greater  return  for  the  higher  grades  of  those  laborers 
whose  numbers  are  of  importance.  Wages  therefore  in  their 
social  significance  occupy  a  position  midway  between  homo- 
geneous interest  and  homogeneous  rents.  In  one  sense  wages 
vary  like  rents;  in  another  sense  there  is  a  rate  of  wages  like 
a  rate  of  interest. 

There  is  stUl  another  sense  in  which  we  can  speak  of  a  gen- 
eral rate  of  wages.  When  values  are  measured  in  terms  of 
money,   we   use   the   term   general  level  of  prices.     Wages  as 


§172]  Nature  of  Wages  415 

well  as  prices  may  be  high  or  low.  This  connection  between 
wages  and  money  leads  to  a  distinction  of  some  importance; 
namely,  between  money  wages  and  real  wages.  Money  wages 
are  actual  wages  paid  in  money;  real  wages  are  the  actual 
commodities  that  the  money  wages  can  buy.  If  prices  of 
food,  clothing  and  shelter  rise  faster  than  the  price  of  labor, 
real  wages  will  fall  although  money  wages  rise.  The  employer's 
interest  is  in  money  wages;  the  laborer's  interest  is  in  real 
wages.  The  employer  compares  what  he  pays  with  the  product; 
the  laborer  compares  what  he  receives  with  his  expenses. 

Wages,  again,  although  they  are  undoubtedly  prices,  may 
yet  be  usefully  contrasted  with  the  prices  of  things.  Labor  is  a 
commodity  in  the  sense  that  everything  which  has  a  price  is  a 
commodity.  Labor,  however,  is  a  peculiar  kind  of  commodity. 
The  chief  peculiarities  are  four  in  number,  (i)  Commodities 
are  produced  for  the  sake  of  the  services  which  they  render. 
The  increased  supply  of  human  beings  is  not  due  to  any  such 
consideration.  Under  slavery,  where  a  man  was  a  thing, 
human  beings  were  kept  for  breeding  purposes;  but  in  a  state 
of  freedom  this  consideration  disappears.  It  is  true,  as  stated 
above  (§  26),  that  the  poor  often  look  forward  to  their  children 
as  so  many  additional  supports  to  the  family.  But  he  would 
be  rash  indeed  who  would  assert  that  this  is  the  motive  of  the 
increase.  Commodities  are  produced  for  certain  ends;  human 
beings  are  ends  in  themselves.  (2)  A  commodity  once  in  exist- 
ence continues  to  give  its  services  unbidden;  a  laborer  may 
work  or  not,  as  he  lists.  The  commodity  takes  no  holiday  and 
does  not  strike.  The  mule  and  the  slave  respond  to  the  lash; 
harsh  treatment  of  the  workman  may  diminish  rather  than 
augment  output.  (3)  Labor  is  perishable,  while  many  com- 
modities are  durable.  After  the  lapse  of  a  certain  time  the 
laborer  must  sell  his  labor  or  starve.  Laborers  and  capitalists 
need  each  other,  but  under  normal  conditions  the  need  of  the 
laborer  is  more  urgent.  (4)  Finally,  labor  is  inseparable  from 
the  laborer,  while  the  commodity  may  be  separated  from  its 


41 6  Wages  [§173 

owner.  Commodities  are  sold  wherever  the  owner  desires; 
labor  can  be  sold  only  where  the  laborer  is.  The  owner  of 
commodities  may  stay  where  he  likes  and  send  his  commodities 
where  he  finds  a  market;  the  laborer  must  accompany  his  labor 
to  the  market.  The  one  is  in  this  respect  free,  the  other  unfree. 
It  is  therefore  not  necessary  to  resort  to  obvious  ethical 
considerations  in  order  to  recognize  the  difference  between 
human  beings  and  inanimate  objects.  The  economic  contrast 
is  a  result  of  man's  personality,  but  it  is  none  the  less  an  eco- 
nomic contrast.  The  service  of  a  material  good  is  a  commodity, 
and  the  good  itself  is  wealth;  the  labor  of  man  is  a  commodity, 
but  man  himself  is  not  wealth.  The  things  exist  for  the  services 
which  they  afford,  but  rnan  does  not  exist  for  wealth;  wealth 
exists  for  man.  The  price  of  labor,  like  the  price  of  everything 
else,  is  the  result  of  economic  forces,  and  of  economic  forces 
alone;  but  labor  is  such  a  peculiar  kind  of  commodity  that  the 
economic  forces  are  present  in  different  proportions  and  thus 
affect  the  result  differently. 

173.  Wages  and  Cost 

After  these  preliminaries  we  are  prepared  to  attack  the 
problem  of  the  law  of  wages.  The  most  common  statement  is 
that  wages  depend  upon  supply  and  demand.  In  the  sense 
that  all  value  depends  upon  the  equilibrium  between  supply 
and  demand,  this  is  true  enough;  but  unless  we  analyze  the 
forces  affecting  normal  supply  and  demand,  the  statement  is, of 
little  use.  In  the  way  in  which  it  is  usually  framed,  moreover, 
the  assertion  leads  to  false  implications.  When  the  ordinary 
man  speaks  of  demand  and  supply  in  reference  to  labor,  he 
thinks  only  of  the  market  variations  rather  than  of  the  point 
about  which  the  actual  rates  oscillate.  Demand  and  supply, 
as  commonly  understood,  afford  a  proximate  rather  than  an 
ultimate  explanation.  As  soon,  however,  as  normal  demand 
and  supply  are  meant  we  are  confronted  by  other  causes. 

The  earliest  attempt  to  supply  this  more  ultimate  explana- 


§173]  Wages  and. Cost  417 

tion  was  the  cost,  or  cost-of-production,  theory  of  wages. 
Market  value,  it  was  said,  depends  upon  demand  and  supply, 
but  in  all  reproducible  commodities  normal  value  is  fixed  by 
cost  of  production.  Labor  is  a  reproducible  commodity,  and 
therefore  its  value  must  be  fixed  by  its  cost  of  production. 
The  cost  of  production  of  labor,  however,  is  the  cost  of  per- 
petuating a  supply  of  laborers.  Since  the  only  restriction  on 
population  was  supposed  to  be  the  bare  possibility  of  support- 
ing life,  it  was  held  that  the  supply  of  laborers  would  increase 
up  to  this  point  of  the  minimum  of  subsistence  f6r  each.  The 
rate  of  wages,  therefore,  always  tends  to  be  at  the  bare 
minimum  of  subsistence,  and  the  cost-of-production  theory 
becomes  equivalent  to  the  minimum-of-subsistence  theory. 
Sometimes  this  is  also  called  the  iron  law  or  the  brazen  law  of 
wages,  because  of  the  assumed  rigidity  of  the  principle. 

This  theory  was  defective  in  two  points.  In  the  first  place  in 
its  identification  of  labor  with  a  simple  reproducible  commodity 
it  neglected  the  possibility  of  such  an  automatic  check  to 
population  as  would  in  any  progressive  community  result  in  a 
certain  higher  level  below  which  labor  will  not  be  carried  on. 
Secondly,  it  committed  the  error,  common  to  all  the  early 
economists,  of  holding  that  price  is  fixed  by  cost  of  production, 
whereas  we  know  that  the  relation  is  more  indirect.  In  the 
face-of  the  constant  rise  of  wages  during  the  nineteenth  century, 
coupled  with  a  still  greater  increase  of  population,  the  mini- 
mum-of-subsistence theory  of  wages  finally  broke  down. 

A  variation  of  the  same  doctrine  was  the  wages-fund  theory. 
This  rested  upon  the  three  premises,  first,  that  wages  are  paid 
out  of  capital;  second,  that  the  amount  of  capital  available  at 
any  given  time  for  such  payment  of  wages  is  predetermined 
and  fixed;  third,  that  the  greater  the  number  of  laborers,  the 
smaller  the  share  of  each.  The  conclusion  was  that  since 
laborers  can  influence  only  their  own  numbers  and  not  the 
predetermined  amount  of  capital,  all  independent  efforts  to 
improve  their  position  by  collective  action  are  futile:  the 
27 


41 8  Wages  [§  174 

sole  method  for  the  laborer  to  increase  wage?  is  to  keep 
down  population.  Any  interference,  moreover,  on  the  part  of 
government  with  the  profits  of  capital  will  diminish  the  wages 
fund  and  thus  decrease  wages.  As  one  of  the  more  popular 
writers  put  it:  "Labor  is  a  commodity.  If  men  will  marry 
and  bring  up  children  to  an  overstocked  and  expiring  trade, 
it  is  for  them  to  take  the  consequences.  If  we  stand  between 
the  error  and  its  consequences,  we  stand  between  the  evil  and 
its  cure;  if  we  intercept  the  penalty,  we  perpetuate  the  sin." 

Further  reflection  showed,  however,  that  each  of  the  three 
premises  of  the  wages-fund  doctrine  was  vulnerable,  (i) 
Wages  are  not  paid  out  of  capital;  they  are  only  advanced  out 
of  capital.  They  are  paid  out  of  the  product.  Labor,  like 
capital,  earns  its  own  remuneration.  They  may  co-operate  to 
effect  a  certain  result,  but  the  wages  are  not  paid  out  of  the 
capital  in  any  different  sense  than  the  interest  or  profits  are 
paid  out  of  the  labor.  Both  are  paid  out  of  the  joint  product 
which  they  create.  (2)  There  is  no  such  rigidity  in  the  avail- 
able amount  of  capital  as  is  assumed.  The  capital  applied  to 
production  is  as  susceptible  of  increase  as  is  the  labor  force. 
Both  are  at  any  given  moment  elastic  quantities.  Increase 
the  remuneration  of  either,  and  the  supply  will  grow.  (3) 
Finally,  to  affirm  that  the  rate  of  wages  is  a  quotient  to  be 
arrived  at  by  dividing  the  dividend  or  wages  fund  by  the  divisor 
or  number  of  laborers,  and  that  wages  hence  rise  or  fall  merely 
with  the  changes  in  population,  rests  not  only  on  the  error 
of  considering  the  dividend  as  fixed,  but  upon  the  neglect  to 
remember  that  the  laborers  make  a  contribution  to  the  product 
and  thus  increase  the  sum  to  be  divided. 

With  the  breakdown  of  both  the  minimum-of-subsistence  and 
the  wages-fund  theory  of  wages  the  way  was  prepared  for  the 
modern  doctrine. 

174.  Wages  and  Efficiency 

In  order  to  reach  a  consistent  theory  of  wages  we  must 
revert    to   fundamental   principles.     All    things   possess   value 


Ci 


§  174]  Wages  and  Efficiency  419 

because  of  the  services  which  they  render.  The  value  of  all 
production  goods  depends  on  the  value  of  the  consumption 
goods.  If  the  price  of  iron  products  falls,  the  price  of  ijon  ore 
will  fall.  Production  goods,  however,  are  composed  not  only 
of  concrete  objects  but  of  labor.  Labor,  therefore,  has  a  value 
because  its  services  or  products  have  a  value.  If  the  labor  is 
misspent,  the  product  is  valueless,  and  in  the  long  run  the 
labor  will  be  equally  so.  Labor  secures  a  remuneration  because 
it  produces  something  for  which  people  are  willing  to  pay. 
In  other  words,  wages  depend  on  productivity. 

The  value  of  labor,  however,  like  the  value  of  all  things,  is 
affected  by  marginal  increments.  If  a  man  applies  his  labor 
to  land  which  is  so  abundant  that  it  can  be  had  for  the  asking, 
there  will  be  no  rent  of  the  land,  and  the  value  of  the  entire 
product  will  consist  of  wages.  By  increasing  the  number  of 
workmen,  the  product  may  be  more  than  proportionately  in- 
creased, because  the  plot  may  be  large  and  several  laborers  in 
co-operation  may  accomplish  so  much  better  results  that  the 
share  of  each  will  be  greater.  After  the  point  of  maximum 
utilization  has  been  reached,  however,  the  law  of  diminishing 
returns  will  assert  itself,  and  each  additional  laborer  will  add 
relatively  less  to  the  product,  until  if  the  process  were  con- 
tinued long  enough  a  new  laborer  would  make  no  addition  at 
all.  The  process  will  never  actually  be  carried  to  this  point, 
since  the  object  of  activity  is  the  attainment  of  some  result; 
if  there  is  no  result,  the  activity  will  cease.  At  any  given 
time,  however,  there  is  always  a  final  or  marginal  workman 
I  who  is  making  some  contribution  to  the  product.  If  there  is 
free  competition  and  if  all  the  laborers  do  their  allotted  task 
equally  weU,  so  that  there  is  no  choice  between  them,  the 
share  of  the  product  ascribable  to  any  of  the  workmen  must  be 
equal  to  the  additions  made  by  the  last  or  marginal  laborer 
actually  at  work.  Since  the  value  of  the  entire  product  is  here 
due  to  labor,  the  rate  of  wages  is  equal  to  the  product  of  the 
marginal  laborer.     Wages  depend  upon  marginal  productivity. 


420  Wages  [§  174 

If,  instead  of  operating  with  a  given  piece  of  land,  the 
laborer  were  to  utilize  a  given  quantity  of  capital,  the  resuU 
would  be  the  same.  Suppose  that  the  labor  is  applied  to  a 
given  quantity  of  looms.  The  total  product  here  indeed  is 
not  wholly  due  to  the  labor,  because  the  looms  cost  something, 
whereas  the  land  was  so  plentiful  that  it  cost  nothing.  The 
share  of  the  product  due  to  the  looms,  however,  is  equivalent  to 
the  interest  on  the  capital  invested.  If  the  number  of  looms 
remains  fixed  and  there  are  no  changes  in  the  demand,  each 
additional  workman  will  add  an  increasingly  smaller  increment 
to  the  total  product;  and  the  share  of  the  product  at  any  given 
time  due  to  the  labor  will,  as  before,  be  equal  to  the  contribu- 
tion made  by  the  workman  that  is  employed  at  the  margin. 
What  he  earns  sets  the  standard  for  all  the  others. 

In  actual  life,  indeed,  the  quantities  of  land  and  capital  are 
fixed  just  as  little  as  is  the  number  of  laborers.  The  marginal 
employment  of  laborers  will  therefore  depend  not  alone  on  the 
amount  of  labor,  but  on  the  amount  of  the  other  productive 
factors.  For  these  are  all  competing  with  each  other.  At  a 
certain  point  in  the  process  of  increasing  the  number  of  work- 
men on  a  given  plot  of  land  it  will  be  more  profitable  to  use 
more  land  instead  of  more  workmen;  and  as  the  better  land 
acquires  a  value,  a  part  of  the  product  will  consist  of  land  rent. 
In  the  same  way  at  a  certain  point  it  will  pay  better  to  use  more 
looms,  so  that  an  increasing  part  of  the  product  will  consist 
of  the  rent  of  the  looms  or  of  the  interest  on  the  capital  in- 
vested in  the  looms.  Since  the  looms  occupy  space,  the  pro- 
duct will  be  divided  into  land  rent,  interest  and  wages.  And 
if  there  are  continual  temporary  changes  going  on,  a  part  of 
the  product  will  take  the  shape  of  profits  to  the  entrepreneur. 
All  this,  however,  although  it  may  obscure,  cannot  prevent,  the 
fact  that  there  is  always  a  point  of  marginal  employment  of 
labor,  and  that  at  this  margin  there  is  a  certain  part  of  the 
product  ascribable  to  labor.  The  normal  rate  of  wages,  that 
is,  the  amount  to  which  wages  tend  to  conform  under  conditions 


§  175]  Rate  of  Wages  421 

of  free  competition  and  mobility  of  both  capital  and  labor, 
is  the  amount  of  value  which  a  given  increment  of  labor  pro- 
duces at  the  margin. 

175.   Rates  of  Wages 

It  may  be  claimed  that  the  productivity  of  anything  at  the 
margin  depends  on  relative  scarcity.  Scarcity,  however,  con- 
notes supply,  and  the  supply  of  labor,  like  that  of  other  things, 
depends  on  cost  of  production.  Are  we  not  then,  after  all, 
really  coming  back  to  the  cost  theory  of  wages? 

The  cost  theory,  however,  can  no  longer  be  stated  as  the 
minimum-of-subsistence  theory.  The  cost  of  living  at  any 
given  time  is  affected  by  the  standard  of  life.  With  the  pro- 
gress of  civilization  and  the  alteration  of  human  wants,  the  stand- 
ard changes.  The  standard  of  the  Chinese  coolie  differs  from 
that  of  the  American  workman;  the  standard  of  the  farm  hand 
from  that  of  the  factory  operative.  When  the  cost  theory  of 
wages  is  couched  in  terms  of  the  standard  of  life  theory  it  loses 
its  pessimistic  connotation.  For  if  wages  vary  with  the  stand- 
ard of  life,  anything  which  lifts  the  standard  will  raise  the 
rate  of  wages. 

In  reality,  however,  the  standard  of  life  cannot  accomplish 
the  impossible.  The  highest  standard  will  not  prevent  wages 
from  falling  in  the  face  of  a  decrease  in  the  demand  for  the 
product  and  a  decline  in  industrial  prosperity.  If  the  em- 
ployers cannot  sell  their  product  at  a  given  price,  they  must 
lower  cost  or  abandon  the  business.  From  this  point  of  view 
the  cost  of  labor  is  like  the  cost  of  anything  else;  it  must  adjust 
itself  to  the  price.  As  was  said  by  Longfield  three-quarters 
of  a  century  ago,  the  wages  of  the  laborer  depend  upon  the  value 
of  his  labor  and  not  upon  his  wants. 

The  standard-of-life  theory  and  the  productivity  theory  may 
thus  be  declared  complementary.  They  are  both  true  in  the 
sense  that  the  cost  and  the  utility  theories  of  value  are  trueo 
But  while  marginal  utility  tends  to  equal  marginal  cost,   we 


42  2  Wages  [§  175 

know  that  the  ultimate  explanation  of  value  is  to  be  found  on 
the  side  of  utility  and  that  marginal  cost  adjusts  itself  to  mar- 
ginal utility.  Cost  seems  to  be  the  cause  of  value,  but  is  in 
reality  a  measure  rather  than  a  cause.  So,  in  the  same  way, 
marginal  productivity  (that  is,  marginal  efficiency  or  utility) 
is  the  causa  causans  of  the  rate  of  wages,  while  the  standard  of 
life  (or  marginal  cost),  which  seems  to  be  cause,  in  reality 
adjusts  itself  to  the  productivity.  The  rate  of  wages  may  be 
expressed  in  terms  of  either,  but  the  positive  force  is  productivity. 
The  standard  of  life,  however,  is  of  exceedingly  great  im- 
portance. It  oftens  serves  as  a  dyke  to  prevent  for  a  time  at 
least  the  inundation  of  the  field.  It  is  here  that  the  contrast 
between  men  and  things  is  apparent.  With  ordinary  com- 
modities, a  new-comer  who  can  produce  the  same  goods  at 
lower  cost  will  reduce  the  price.  With  labor,  if  the  cost,  that 
is,  the  standard  of  life,  has  become  a  customary  one,  the  new- 
comer will  not  be  so  apt  voluntarily  to  submit  to  a  lower  stand- 
ard. To  the  ordinary  producer  low  cost  of  the  product  means 
high  gains;  to  the  laborer  low  cost  of  the  product,  that  is,  low 
wages,  means  low  gains.  It  is  only  where  the  new-comers  are 
habituated  to  a  lower  standard  and  where  the  exigencies  of  the 
situation  force  them  to  accept  the  smallest  sum  the  employers 
will  give,  that  the  real  difficulty  arises.  Thus  women's  wages 
are  frequently  lower  than  men's,  not  only  because  in  some  oc- 
cupations women  produce  less  than  men,  but  also  because,  even 
where  the  product  is  the  same,  the  woman's  standard  of  life  is 
lower,  in  that  she  is  generally  not  the  support  of  the  family 
and  is  often  not  entirely  dependent  on  her  earnings.  In  the 
same  way  the  immigrant  receives  lower  wages  than  the  native 
workman,  not  only  because  his  contribution  to  the  product  is 
frequently  less  through  ignorance  or  lack  of  skill,  but  because 
his  standard  of  life  is  so  much  lower  that  he  will  be  wilHng 
to  work  for  less  —  at  least  until  he  becomes  educated  up  to 
the  new  standard  of  life. 


§  176]  Course  of  Wages  423 

176.   Course  of  "Wages 

Since  wages  are  fixed  by  the  value  of  the  marginal  incre- 
ment of  labor  employed,  changes  in  the  normal  rate  of  wages 
depend  upon  changes  in  the  location  of  the  margin.  These 
changes  may  take  place  on  the  side  of  labor  or  on  that  of  the 
other  factors  of  production. 

Anything  which  tends  to  enhance  the  productivity  of  labor 
in  itself  will  increase  the  product  of  the  marginal  unit  and  thus 
raise  the  rate  of  wages.  Education,  the  development  of  mental 
and  moral  vigor,  energy  and  application  —  in  short,  all  those 
qualities  which  differentiate  advanced  from  low-grade  com- 
munities —  tend  to  raise  wages  because  they  increase  product. 
So  far  as  governmental  action  or  labor  organizations  succeed 
in  lifting  this  plane  of  efficiency  they  also  contribute  to  the 
rise  of  wages.  From  this  point  of  view  the  standard  of  life 
acquires  an  additional  significance,  because  of  the  reflex  action 
of  the  standard  itself  upon  the  efficiency  of  the  laborer.  The 
better  the  man,  the  more  valuable  his  work.  On  the  other 
hand,  the  margin  may  be  affected  by  changes  in  the  other  fac- 
tors of  production.  For  instance,  when  land  is  relatively 
plentiful  as  compared  to  labor,  the  margin  is  high.  In  all  new 
countries  land  rent  is  small,  population  sparse,  and  the  return 
to  labor  abundant.  In  proportion  as  land  becomes  scarcer  or 
less  fertile,  wages  tend  to  fall  relatively  to  land  rent.  Per 
contra,  when  new  sections  are  opened  by  colonization  or  immi- 
gration, the  tendency  is  for  rent  to  fall  and  wages  to  rise.  If 
land  were  the  only  other  factor  to  be  considered,  it  would  be 
true  that  land  rent  tends  to  rise  at  the  expense  of  wages. 

Land,  however,  is  not  the  only  factor.  As  the  supply  of 
capital  becomes  more  copious,  the  joint  product  of  capital  and 
labor  rapidly  increases.  With  the  growth  in*  the  supply  of 
capital  the  rate  of  interest  tends  to  fall.  When  the  rate  be- 
comes as  low  as  in  modern  industrial  communities,  there  is 
such  a  perpetual  and  prodigious  renewal  and  multiplication  of 


424  Wages  [§  176 

capital  that  the  productivity  of  the  marginal  laborer  will  con- 
stantly augment.  Instead  of  working  with  no  tools  or  poor 
tools,  he  will  have  at  his  disposal  ever  better  implements 
and  finer  machinery.  Yet  these  better  tools  and  finer  ma- 
chinery will  cost  constantly  less.  The  product  will  be  larger, 
and  the  part  of  the  joint  product  to  be  ascribed  to  capital 
will  be  relatively  smaller.  Wages,  in  other  words,  will  tend 
to  rise. 

Where  both  these  forces  operate  simultaneously  the  result 
depends  on  their  reciprocal  influence.  In  early  stages  of  eco- 
nomic development,  as  in  some  of  our  Western  states,  both 
wages  and  interest  fall  while  land  rent  rises.  In  the  older 
and  industrially  progressive  sections,  on  the  other  hand,  the 
increase  of  capital  may  overbalance  the  relative  scarcity  of 
land,  and  although  land  rent  will  rise,  the  total  product  will 
increase  so  much  more  rapidly  that  wages  will  rise  as  well. 
Wages  in  the  great  industrial  establishments  of  New  England 
have  increased  during  the  last  half-century,  despite  the  growth 
of  land  rents.  Capital  tends  to  raise  the  marginal  contribution 
of  the  laborer,  because  it  adds  to  his  efficiency,  that  is,  to  his 
control  of  the  powers  of  nature. 

There  exist  in  all  the  important  countries  ample  statistics  to 
show  the  advance  in  real  wages  since  the  early  stages  of  the 
capitalist  system.  We  shall  content  ourselves  with  reproducing 
in  the  table  on  page  426  the  figures  for  the  United  States  since 
the  Civil  War.  These  disclose  the  striking  fact  that  real  wages, 
that  is,  the  amount  of  commodities  that  can  be  bought  with  the 
money  wages,  have  risen  more  than  100  per  cent  in  industry 
and  more  than  70  per  cent  in  agriculture.  In  other  words, 
notwithstanding  the  practical  exhaustion  of  the  free  lands  and 
the  rise  in  land  rents,  wages  have  increased  so  that  the  labor- 
ers enjoy  a  continually  greater  command  over  the  conveniences 
of  life.  There  could  be  no  more  eloquent  testimony  to  the 
power  of  the  modern  industrial  system  to  enhance  the  welfare 
of  mankind.     We  also  add  (opposite  page  424)  a  chart  show- 


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§177]  Variations  in  Wages  425 

ing  the  relation  of  wages  to  hours  of  work  in  the  United  States, 
as  compared  with  prices  of  food,  from  1890  to  1907. 

177.   Variations  in  "Wages 

Actual  wages  differ  from  normal  wages  thus  far  considered 
in  three  respects.  The  variation  may  be  due  to  market  in- 
fluences, to  the  nature  of  the  occupation,  or  to  the  conditions 
of  equality  as  between  the  giver  and  the  recipient  of  wages 
in  the  same  occupation. 

(i)  Market  variations  need  not  detain  us  long.  Like  all 
market  prices,  wages  in  every-day  life  are  the  result  of  ephem- 
eral changes.  While  of  the  utmost  importance  to  the  prac- 
tical business  man,  the  market  oscillations  do  not  lend 
themselves  to  any  detailed  analysis.  In  brisk  times,  when 
the  temporary  demand  increases  faster  than  the  supply,  wages 
advance  and  vice  versa.  Farm  hands  secure  higher  pay  at 
harvest  time;  factory  operatives  must  choose  between  lower 
wages  or  less  work  during  a  period  of  great  temporary  depres- 
sion. These  facts  are  so  obvious  as  to  need  no  elaborate 
explanation. 

(2)  The  inequalities  may  be  due  to  the  occupations  them- 
selves. We  do  not  here  indeed  deal  with  market  wages,  but 
the  wages  are  normal  only  within  each  occupation.  They  are 
particular  normal  wages,  not  general  normal  wages.  Some- 
times the  inequahty  is  more  ostensible  than  real.  The  sea- 
sonal demand  may  differ.  In  the  wholesale  clothing  trade  the 
two  busy  seasons  are  followed  by  the  slack  months;  the  brick- 
layer can  ply  his  vocation  only  in  favorable  weather.  The 
rate  of  wages  for  permanent  workmen  must  be  such  as  to  equal- 
ize these  differences.  The  high  nominal  day  wages  of  the 
bricklayer  may  be  far  lower  real  monthly  wages;  the  high 
weekly  or  monthly  wages  of  the  clothing  "operator"  during  the 
busy  season  may  be  only  moderate  real  yearly  wages. 

Adam  Smith  attempted  to  reduce  the  inequalities  in  wages 
to  five  causes:    the  agreeableness  of  the  occupation,  the  con- 


426 


Wages 


[§  177 


MOVEMENT  OF  NOMINAL  AND  REAL  WAGES,  1866-1903 
(1890  AS  THE  STANDARD  YEAR). 


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Falkner's  Index 
Nos.i 

1884 

98.5 

90.0 

1885 

97.8 

98.2 

99.1 

99-5 

1866 

68. 5 

47-9 

lOO.O^ 

70.0 

1886 

97.8 

98. 1 

1867 

73  7 

56.0 

1887 

98.6 

97.8 

1868 

72-3 

53-9 

1 888 

99.2 

96.6 

99-3 

96.7 

1S69 

75.2    ■ 

52.7 

9S.0 

81.8 

1889 

99.6 

948 

25  Occupations.^ 

Bureau  of  Labor,* 

City  Wages. 

519  Occupations. 

1870 

873 

68.7 

l8qO 

1 00.0 

100.0 

100. 0 

1 00.0 

.871 

94-7 

72.2 

I89I 

99-7 

98.4 

1872 

97.0 

74-9 

1892 

100.3 

100.8 

100.7 

loi  2 

'873 

93-2 

76.3 

1893 

100.2 

98.3 

106.7 

104.7 

1874 

91. 1 

73-2 

1894 

96.7 

99.4 

97-7 

100.3 

•875 

88.7 

72.5 

90.8 

74-3 

1895 

97-4 

102.0 

96.5 

lOI.O 

1876 

86.3 

74-4 

1896 

98.5 

105.7 

.877 

88.8 

77.8 

1897 

98.2 

104.5 

1878 

91-3 

82  9 

1898 

99.0 

102.7 

107.9 

III. 9 

1879 

91.8 

90s 

83. 8 

82.6 

1899 

100.2 

103. 1 

113-0 

116.3 

1880 

92.6 

82.8 

1900 

103.1 

104.5 

i88i 

9S-3 

82.4 

1 901 

104.8 

102. 1 

1882 

96.9 

833 

99-7 

85-7 

1902 

108.2 

1 00.0 

131  7 

121. 6 

1883 

97-7 

85.9 

■903 

III. 2 

103.2 

*  Unweighted  averages  of  wages  in  21  industries,  from  Senate 
(Aldrich)  Report  on  Wholesale  Prices,  Wages  and  Transportation,  p.  180. 
All  wages  in  this  table  are  on  the  gold  basis,  and  all  real  wages,  down  to 
1889  are  based  upon  Falkner's  weighted  inde.x  numbers  of  prices,  from 
the  same  report,  p.  100.  The  meaning  of  the  terms  weighted  and  un- 
weighted are  explained  below  (§  189). 

^  Unweighted  averages  covering  12  important  cities,  from  Bulletin  of 
the  Department  of  Labor,  No.  18,  p.  669. 

*  Weighted  averages  of  monthly  wages,  reduced  to  gold  basis,  com- 
piled from  Bulletin  No.  26,  miscellaneous  series,  United  States  Depart- 
ment of  Agriculture,  p.  15. 

*  Weighted  averages  of  weekly  earnings  from  Bulletin  of  the  Bureau 
of  Labor,  No.  53,  pp.  721-723.  All  real  wages  from  1890  to  1903  based 
upon  index  numbers  of  retail  prices  given  in  this  bulletin. 

This  table  is  taken  from  Adams  and  Sumner,  Labor  Problems  (1905), 
514.     It  is  selected  as,  on  the  whole,  the  most  accurate  and  conservative 


§  177]  Variations  in  Wages  427 

stancy  of  employment,  the  ease  of  learning  the  trade,  the  degree 
of  trust  to  be  reposed  in  the  workman,  and  the  probability  of 
success.  In  a  more  general  way,  however,  it  may  be  said 
that  inequality  of  pay  is  due  to  inequality  of  work.  A  watch- 
maker gets  more  than  a  street-sweeper  because  his  contribu- 
tion to  the  product  is  greater.  If  all  units  of  labor  were  at 
least  potentially  equal,  and  if  there  was  complete  mobility,  the 
street-sweepers  would  all  become  watch-makers  and  wages 
would  stand  at  a  level.  Obviously,  however,  the  higher  the 
degree  of  required  skill,  the  greater  the  relative  scarcity  of 
workmen.  This  scarcity  may  be  due  to  four  causes:  a  defi- 
ciency of  natural  talent,  a  lack  of  opportunity,  the  cost  of 
mastering  the  trade,  and  the  obstacles  in  the  way  of  move- 
ment from  employment  to  employment.  The  differences 
between  occupations  may  thus  be  either  natural  or  artificial; 
in  either  case  the  labor  force  is  at  any  given  time  divided  into 
what  are  in  some  respects  at  least  non-competing  industrial 
groups. 

(3)  Finally,  the  discrepancy  between  normal  and  actual 
wages  may  be  due  to  conditions  of  inequality.  This  may  be 
ascribable  to  the  fact  that  there  is  only  one-sided  competition, 
or  that  the  conditions  of  the  mutual  competition  are  different. 
There  may  be  a  monopoly  on  the  labor  side.  If  any  group  of 
workmen  can  secure  such  a  complete  control  of  the  trade  that 

presentation  of  the  facts.  The  authors  give  several  warnings  as  to  the 
use  of  the  table:  (i)  In  the  industrial  group,  the  figures  are  the  results 
of  three  distinct  investigations.  The  averages  are  not  absolutely  com- 
parable. But  the  probable  error  is  slight.  (2)  Up  to  1889  the  compar- 
ison is  with  wholesale  prices,  after  1890  with  retail  prices.  The  effect  of 
this  is  probably  to  exaggerate  the  relative  advance  of  real  wages  for  the 
earUer  period.  (3)  Statistics  of  real  wages  are  really  trustworthy  onlj'  in 
periods  of  normal  prosperity.  In  time  of  depression,  prices  fall  more 
quickly  than  wages,  so  that  real  wages  seem  to  be  increasing  when  in 
reality  there  is  much  more  unemployment  and  a  decline  in  the  welfare  of 
the  laborers  as  a  whole.  Thus  in  1896  the  real  wages  seem  to  be  higher 
than  in  1892  or  1902. 


428  Wages  [§  177 

it  need  fear  no  entrance  of  undesired  members,  it  can  raise  the 
rate  of  wages  considerably  above  the  normal  point.  In  rare 
cases  only  is  this  possible  on  a  large  scale  in  modern  times. 
When  the  workmen  are  not  securely  intrenched  by  legal  priv- 
ilege, as  in  the  later  stages  of  the  mediaeval  guilds,  a  rise  of 
wages  far  above  the  normal  level  in  any  one  occupation  will 
set  in  motion  forces  which  will  ultimately  be  strong  enough  to 
break  down  the  artificial  barriers.  If  the  group  is  unduly  re- 
strictive in  its  membership,  the  pressure  from  the  outside  will 
result  in  the  formation  of  analogous  groups,  anxious  to  partici- 
pate in  the  extra  gains,  and  ready  to  take  over  a  share  of  these 
gains.  Minor  instances,  however,  of  this  temporary  monopo- 
listic excess  of  wages  are  by  no  means  infrequent. 

On  the  other  hand,  competition  may  be  absent  on  the  side  of 
the  employers.  Capital  monopolies,  however,  have  even  less 
opportunity  of  driving  wages  down  below  the  normal  level 
than  labor  monopolies  have  of  raising  them  above  the  level. 
For  even  though  there  may  be  no  competition  within  the  par- 
ticular industry,  there  will  always  be  the  competition  between 
different  industries  for  a  supply  of  workmen.  The  laborers 
are  not  compelled  to  enter  the  employ  of  the  monopoly,  and 
will  not  do  so  w-hen  the  wages  offered  are  lower  than  in  similar 
occupations.  In  point  of  fact,  capital  monopolies  do  not  pay 
lower  wages.  The  American  v/orkmen  in  their  official  unions, 
as  we  have  seen,  are  not  opposed  to  the  monopolies  and  trusts 
on  the  score  of  low  wages.  The  really  perilous  effects  of  capi- 
tal monopoly  on  wages  is  of  a  more  insidious  kind.  All  mo- 
nopoly means  a  relative  restriction  of  production,  for  the  point 
of  maximum  monopoly  revenue  does  not  necessarily  correspond 
to  that  of  maximum  competitive  output  and  marginal  competi- 
tive cost.  Since  wages  stand  in  such  a  close  relation  to  pro- 
ductivity, a  diminution  of  product  must  finally  diminish  the 
amount  available  for  the  payment  of  wages.  Monopoly  of  in- 
dustry is  at  bottom  as  prejudicial  to  the  wage-earner  as  to  the 
consumer. 


§  178]  Wages  and  Profits  429 

Of  more  importance  in  practical  life  is  the  divergence  of 
actual  from  normal  wages  ascribable  to  inequality  in  the  con- 
ditions of  competition.  As  we  learned  at  the  outset  of  our 
discussion,  the  ability  to  drive  a  bargain  varies,  and  a  unitary 
market  price  can  emerge  only  when  theje  are  complete  com- 
petition and  mobility  on  the  side  of  both  buyer  and  seller.  In 
the  labor  contract  the  individual  seller  of  labor  is  in  ordinary 
cases  the  weaker  party.  The  workman  is  both  more  ignorant 
and  more  necessitous.  He  is  more  ignorant  because,  while 
the  employer  knows  both  the  cost  of  labor  and  the  price  of  the 
product,  the  workman  is  unacquainted  with  the  details  of 
the  business  and  can  only  guess  at  his  real  contribution  to  the 
product.  He  is  more  necessitous  because  he  cannot  afford  to 
wait.  The  machine  may  lie  idle,  and  profits  may  cease  for  a 
time;  but  running  expenses  also  cease,  at  least  in  part,  and 
when  the  machine  starts  up,  profits  will  follow.  The  laborer 
may  remain  idle,  but  running  expenses,  that  is,  cost  of  living, 
do  not  cease.  If  the  machine  stops,  it  still  endures;  if  the 
workman  stops,  he  starves. 

When  therefore  the  individual  laborer  is  left  to  his  own  de- 
vices, he  may  fail  to  secure  his  due  share  of  the  joint  product. 
Advantage  may  be  taken  of  his  ignorance  or  of  his  necessity; 
and  the  example  that  is  set  by  the  less  scrupulous  employer  is 
not  only  contagious,  but  also  often  imposes  itself  as  a  competi- 
tive condition  upon  others  who  might  naturally  possess  more 
scruples.  The  result  is  a  struggle  between  wages  and  profits 
which  transfers  itself  to  the  arena  of  both  economic  and  politi- 
cal life,  and  which  creates  what  is  known  as  the  labor  problem. 

178.   Wages  and  Profits 

The  relation  of  wages  to  profits  is  thus  complementary  as 
well  as  antagonistic.  They  are  complementary  in  the  sense  that 
prosperity  may  mean  both  high  profits  and  high  wages.  Profits, 
as  we  have  seen,  are  the  chief  inducement  to  enterprise.  The 
anticipated   gains    to    be   derived    from    fluctuations    in    value 


430  Wages  [§  178 

constitute  the  real  incentive  to  business  activity  and  hence  to 
modern  production.  The  hope  of  profits  leads  to  the  invest- 
ment and  increase  of  capital,  and  to  a  better  co-ordination  of 
the  factors  of  production,  and  thus  under  normal  conditions  to 
an  increase  of  output.  The  increase  of  product  is  apt  indeed 
to  be  followed  by  a  growth  of  population.  When  the  product 
increases  at  a  faster  rate  than  the  available  supply  of  workmen, 
that  is,  as  long  as  the  product  keeps  ahead  of  the  population, 
wages  will  tend  to  rise.  Profits  are  constantly  exhausting 
themselves,  only  to  be  renewed  in  a  fresh  attempt  to  conquer 
nature.  High  profits  are  hence  the  best  hope  of  high  wages, 
because  it  is  chiefly  through  the  existence  of  high  profits  that 
mankind  has  any  assurance  of  that  augmented  output  which 
is  the  chief  factor  in  raising  the  marginal  contribution  of  labor. 
Profits  and  wages  are  in  this  sense  complementary. 

On  the  other  hand,  the  immediate  division  of  the  product  in 
each  individual  case  and  at  any  given  moment  is  largely  one 
of  relative  power.  The  more  that  is  taken  as  profits  by  any 
single  employer  or  group  of  employers,  the  less  will  be  available 
as  wages;  the  more  that  is  paid  as  wages,  the  less  will  be  re- 
ceived as  profits.  In  this  sense  wages  and  profits  are  antago- 
nistic. In  good  times  wages  and  profits  both  go  up,  in  bad 
times  wages  and  profits  both  go  down;  but  at  all  times  both 
employer  and  employees  will  strive  to  secure  the  greatest  pos- 
sible share  of  the  joint  product  for  themselves.  Under  condi- 
tions of  frictionless  competition,  complete  mobility  and  effective 
equality  in  bargaining,  the  share  of  each  will  adjust  itself  to  the 
point  of  relative  contribution  to  the  product;  under  conditions 
of  actual  life  each  side  may  secure  an  excess  at  the  expense 
of  the  other,  and  with  incidental  injury  to  the  public.  In 
the  great  majority  of  cases  the  excess  goes  to  the  employer. 
How  this  excess  may  be  obviated,  and  this  injury  reduced  to 
the  lowest  proportions,  becomes  therefore  a  matter  of  urgent 
concern. 

The  struggle  of  the  laborer  to  improve  his    condition    has 


§178]  Wages   and   Profits  431 

assumed  four  principal  forms.  He  has  sought  to  invoke  the 
protection  of  the  law;  he  has  endeavored  to  strengthen  him- 
self and  his  fellows  by  organization;  he  has  attempted  to  sub- 
stitute a  new  principle  of  remuneration;  he  has  striven  on  the 
basis  of  existing  methods  to  effect  a  working  agreement  with 
the  employers.  In  other  words,  the  four  phases  of  the  struggle 
are  labor  legislation,  labor  organization,  profit  sharing  or  co- 
operation, and  arbitration  or  conciliation.  Reserving  the  first 
and  most  important  phase  for  later  consideration  (chapters 
xxxvii  and  xxxviii)  the  last  three  will  now  engage  our  attention. 


CHAPTER  XXVII 
THE  LABOR  PROBLEM 

179.  References 

In  General:  Adams  &  Sumner,  Labor  Problems  (1905);  J.  R.  Co:r.- 
mons,  Labor  and  Adminislration  (1913);  Commons  and  Andrews,  Prin- 
ciples of  Labor  Legislation  (1916);  G.  Drage,  Labour  Problems  (1896); 
G.  D.  H.  Cole,  The  World  of  Labour  (2d  ed.,  1915);  C.  L  Goodrich,  The 
Frontier  of  Control  (1920). 

Labor  Organization:  S.  and  B.  Webb,  History  of  Trade  Unionism 
(191 1),  and  Industrial  Democracy  (1907);  F.  K.  Carlton,  The  History 
and  Problems  of  Organized  Labor  (191 1);  Hollander  and  Barnett,  Studies 
in  American  Trade  Unionism  (1906);  R.  F.  Hoxie,  Trade  Unionism 
in  the  U.  S.  (1917);  J.  R.  Commons  and  others,  History  of  Labor  in  the 
U.  S.  (1918);  G.  G.  Groat,  Organized  Labor  in  America  (1916);  F.  T. 
Stockton,  The  Closed  Shop  in  American  Trade  Unions  (191 1);  D.  A. 
McCabe,  The  Standard  Rate  in  American  Trade  Unions  (191 2);  T.  \V. 
Glocker,  The  Govcrtiment  of  American  Trade  Unions  (1914);  F.  S.  Hall, 
Sympathetic  Strikes  and  Sympathetic  Lockouts  (1898);  H.  W.  Laidler, 
Boycotts  and  the  Labor  Struggle  (1913);  L.  Wolman,  The  Boycott  in  the 
Trade  Unions  (19 16). 

Profit  Sharing  and  Co-operation:  D.  F.  Schloss,  Methods  of  In- 
dustrial Remuneration  (3d  ed.,  1898) ;  N.  P.  Oilman,  Profit  Sharing  (1889) 
and  A  Dividend  to  Labor  (1899);  Beatrice  Potter  [IMrs.  Webb],  The  Co- 
operative Movement  in  Great  Britain  (1895);  B.  C.  R.  Fay,  Co-operation 
at  Hojne  and  Abroad  (1908);  C.  Webb,  Industrial  Co-operation  (1904); 
J.  G,  Holyoake,  History  of  Co-operation  (2  vols.,  2d  ed.,  1906);  A.  W. 
Burrett.  Profit  Sharing  (1918). 

Arbitration  and  Conciliation:  H.  Crompton,  Industrial  Concilia- 
tion (1876) ;  L  L.  Price,  Industrial  Peace  (1887) ;  A.  M.  Bing,  War  Time 
Strikes  and  Their  Adjttslmcnt  (1921);  V.  S.  Clark,  The  Labor  Movement 
in  Australia  (1906);  H.  Broadhead,  State  Regulation  of  Labor  in  New 
Zealand  (1908);  M.  T.  Rankin,  Arbitration  and  Conciliation  in  Australia 
(1916). 

180.  Labor   Organizations 

The  first  step  in  the  struggle  of  the  laborers  to  secure  a  reason- 
able equity  was  their  endeavor  to  help  themselves  through 
associated  action.    The  organizations,  starting  within  each  trade 

432 


§  i8o]  Labor  Organizations  433 

in  England  during  the  early  decades  of  the  nineteenth  century, 
became  known  as  trade-unions  and  gradually  assumed  a  national, 
and  in  some  cases  even  an  international,  form.  Where  action 
involving  the  general  interest  of  all  unions  becomes  desirable, 
we  find  them,  as  in  the  United  States,  combining  to  form  coun- 
cils or  central  labor  unions  in  the  cities,  state  federations,  and 
finally  national  bodies  like  the  American  Federation  of  Labor. 

The  justification  of  trade-unions  was  long  disputed.  Under 
the  early  law  they  were  illegal  as  conspiracies.  It  was  not 
until  1824  that  they  were  legitimized  in  England,  and  not  until 
much  later  that  the  free  right  of  association  was  conceded  else- 
where. The  recognition  that  is  to-day  almost  universally  ac- 
corded them  rests  on  the  economic  principle  that  in  the  modern 
labor  contract  the  conditions  of  work  have  become  collective 
or  group  conditions  and  that  the  bargaining,  to  be  equal,  must 
be  collective  or  group  bargaining.  The  individual  workman 
is  nowadays  helpless  against  the  typical  employer.  In  a  rail- 
way or  a  large  factory,  work  is  carried  on  under  broad  general 
rules.  The  laborer  who  forms  one  of  a  group  of  tens,  of  hun- 
dreds or  of  thousands  of  workmen  cannot  expect  to  bargain 
successfully  as  an  individual.  His  only  hope  lies  in  associa- 
tion. Freedom  of  contract  is  illusory  because  of  the  self-evident 
inequality.  The  trade-union  is  an  attempt  to  restore  to  the 
individual  as  a  member  of  the  group  the  equality  which  has 
been  lost  through  the  transition  from  small-scale  to  large-scale 
industry.  The  trade-union  is  as  inevitable  a  product  of  modern 
economic  life  as  the  corporation.  The  one  is  an  association  of 
labor,  the  other  an  association  of  capital;  both  are  attempts  to 
attain  individual  prosperity  through  concerted  efforts. 

There  are  two  aspects  to  every  trade-union,  —  the  militant 
and  the  fraternal.  As  a  fraternal  organization  the  union  seeks 
to  accomplish  some  of  the  ends  of  the  old-time  guild.  It  insures 
the  members  against  accident  or  death,  it  supports  them  when 
ill  or  out  of  work,  it  helps  to  educate  them  by  meetings  and 
lectures.  More  important,  however,  are  the  militant  func- 
28 


434  Labor  Problem  [§  i8o 

tions,  through  which  the  union  seeks  to  promote  its  industrial 
power  and  to  increase  the  earnings  of  its  members.  From  this 
point  of  view  its  activities  may  be  reduced  to  two  general  cate- 
gories, —  the  attempt  to  standardize  conditions  of  employment 
and  the  endeavor  to  restrict  work. 

Under  the  first  head  must  be  put  the  effort  to  secure  a  stand- 
ard rate  of  pay  and  a  normal  working  day.  Sad  experience 
has  taught  the  laborer  that  if  the  average  employer  is  free  to 
make  individual  bargains  with  each  workman  he  will  tend  to 
select  the  exceptional  man  to  set  the  pace,  and  by  paying  him 
only  ordinary  wages,  scale  down  the  remuneration  or  overtax 
the  energies  of  the  average  man,  thus  leading  to  premature 
decay  and  a  real  exploitation.  To  prevent  this  progressive 
deterioration  the  unions  seek  to  secure  a  standard  rate  of  wages. 
It  is  sometimes  objected  that  this  implies  uniformity  of  pay- 
ment. This  is  not  quite  accurate.  Wages  are  paid  either  by 
the  piece  or  by  time.  In  the  case  of  piece  work  the  more  skilful 
workman  will  manifestly  earn  more.  In  certain  trades  piece 
work  is  preferred  because,  when  new  machinery  is  constantly 
being  introduced  or  old  machinery  speeded  up,  it  enables  the 
workman  to  share  in  the  advantage  of  the  increased  output. 
In  England  the  unions  advocate  piece  work  in  many  trades; 
in  America  the  preference  is  less  marked,  but  is  found  in  occu- 
pations like  those  of  the  shoe-workers,  the  weavers  and  some 
others.  Even  in  the  case  of  time  work,  however,  which  is  advo- 
cated by  the  great  mass  of  American  unions,  the  uniformity  that 
is  sought  is  that  of  equal  pay  for  equal  work.  There  is  little 
objection  to  putting  the  more  skilful  men  into  classes  higher 
than  the  standard;  but  the  standard  itself  must  not  be 
lowered.  The  effort  is  to  make  the  standard  a  minimum,  not  a 
maximum. 

Even  when  the  uniformity  of  pay  seems  to  be  that  of  a  so- 
called  dead  level,  it  must  not  be  forgotten  that  the  unions  are 
here  following  the  tendency  of  all  modern  life.  The  essence 
of  modern  capitalism  is,  as  we  have  seen,  the  standardization 


§  i8o]  Labor  Organizations  435 

of  industry.  If  business  enterprise  depends  on  mass  output 
and  uniform  production  in  order  to  improve  the  type,  the 
laborer  must  not  be  blamed  for  pursuing  the  same  end.  At 
bottom  the  method  is  that  of  all  democracy.  Democracy  is 
the  most  difficult  form  of  government  because  its  success  de- 
pends on  the  high  level  of  the  mass.  The  path  of  progress 
consists  in  pulling  the  mass  up  to  the  plane  of  the  better  man, 
not  in  developing  the  aristocrat  at  the  expense  of  the  mass. 
Trade-unionism,  like  democracy,  seeks  here  to  level  up,  not  to 
level  down. 

The  fixing  of  a  normal  working  day  seems  to  be  in  contrast 
to  the  standard  rate  of  pay,  because  the  former  prescribes  a 
maximum,  the  latter  a  minimum.  In  reality,  however,  there 
is  no  difference.  In  a  factory  all  must  begin  and  stop  work 
at  the  same  time,  because  all  are  dependent  on  the  machine. 
If  overtime  is  permitted,  it  will  not  be  long  before  the  employ- 
ment will  be  limited  to  those  that  are  willing  to  work  overtime; 
and  when  that  occurs,  the  pay  per  hour  will  inevitably  be 
reduced.  The  attempt  to  curtail  the  hours  of  work  is  really 
an  attempt  to  raise  the  standard  of  pay.  Experience  has  shown 
that  with  the  introduction  of  machinery  concerted  action  of  the 
men  will  be  able  to  extort  higher  pay  with  shorter  hours.  Ac- 
cording to  the  varying  conditions  in  different  industries,  the 
normal  working  day  is  now  in  large  parts  of  the  United  States 
as  low  as  ten,  nine  and  even  eight  hours.  The  maximum  work- 
ing day  as  well  as  the  minimum  rate  of  pay  is  the  result  of 
an  effort  to  standardize  conditions  of  employment,  so  that  the 
standard  may  move  up  instead  of  down. 

The  success  of  the  unions  in  standardizing  employment  is 
always  beneficial  to  the  workmen.  Where  the  conditions  are 
such  that  there  is  a  real  economy  in  high  wages,  it  may  go  hand 
in  hand  with  the  ultimate  interests  of  the  employer  and  the 
public  as  well.  When,  however,  we  come  to  the  other  phase 
of  trade-union  activity  —  the  attempt  to  restrict  work  —  the 
matter  is  somewhat  more  complicated. 


436  Labor  Problem  [§  180 

This  effort  assumes  three  forms,  — •  the  claim  of  the  right  to 
a  trade,  the  limitation  of  apprenticeship,  the  restriction  of  out- 
put. In  the  first  place,  not  a  few  of  the  labor  troubles  of  the 
present  have  their  origin  in  trivial  and  unseemly  quarrels  be- 
tween the  unions  themselves  as  to  who  should  do  the  work. 
These  jurisdictional  disputes  are  either  (a)  territorial  disputes, 
due  to  the  entrance  of  a  new  union  into  a  given  territory;  (b) 
demarcation  disputes,  where  each  union  claims  that  a  particular 
kind  of  work  on  the  fringe  belongs  to  it;  (c)  organization  dis- 
putes, where  the  increasing  specialization  of  industry  calls  into 
being  a  new  union  which  separates  itself  from  the  old,  and  (d) 
trade-autonomy  disputes,  due  to  the  fact  that  some  organiza- 
tions are  industrial  unions,  comprising  all  the  workmen  in  a  given 
industry,  while  others  are  trade-unions  including  only  the  work- 
men in  particular  sections  or  trades  within  a  great  industry. 
All  these  jurisdictional  disputes  represent  an  attempt  to  transfer 
the  old  doctrine  of  vested  interests  from  the  domain  of  capital 
to  that  of  labor.  Secondly,  the  unions  often  insist  on  an  unduly 
long  period  of  apprenticeship,  and  seek  to  limit  the  number  of 
apprentices,  or  to  admit  new-comers  to  membership  only  on 
the  payment  of  high  fees.  Thirdly,  they  frequently  object  to 
the  introduction  of  new  machinery  or  new  methods,  and  when 
this  objection  is  overruled  they  seek  to  limit  the  amount  of 
work  to  be  done  through  the  "go  easy"  or  "ca-canny"  system. 

That  all  these  methods  are  in  one  sense  indefensible  is  clear. 
If  wages  ultimately  depend  upon  product,  any  effort  to  restrict 
product  must  finally  act  as  a  boomerang.  Many  unionists 
believe  that  there  is  a  fixed  amount  of  labor  which  has  to  be 
done;  that  if  their  union  does  not  secure  it,  another  will;  and 
that  if  there  are  fewer  members  of  the  union,  or  if  they  all  work 
less,  or  if  there  are  less  machines,  the  pay  of  each  man  will  be 
higher.  This  "lump-of-labor "  doctrine  of  the  workman  is 
just  as  fallacious  as  the  old  "wages-fund"  theory  of  the  capi- 
talist and  leads  to  equally  erroneous  conclusions. 

From  another  point  of  view,  however,  these  practices  do  not 


§  i8i]  .  Strikes  437 

appear  so  utterly  reprehensible.  The  jurisdictional  disputes  of 
the  unions  are  sometimes  the  result  of  an  effort  to  prevent  the 
standard  rate  in  the  trade  from  being  whittled  down  through 
the  abandonment  of  a  substantial  part  of  the  work  to  those 
accustomed  to  a  lower  remuneration.  The  effort  to  restrict 
apprentices  is  occasionally  due  to  the  endeavor  to  insure  ade- 
quate preparation  for  the  trade,  or  to  frustrate  the  scaling  down 
of  all  wages  to  the  level  of  the  apprentices.  The  attempt  to 
fix  a  maximum  output  may  be  due  to  the  same  reason  which 
led  to  the  maximum  working-day,  —  the  desire  to  prevent  the 
"bell-wether,"  or  "pace-maker,"  or  "rusher,"  or  "leader" 
from  subtly  reducing  the  standard  of  the  average  workman.  In 
short,  while  restriction  of  work  is  in  itself  indefensible  and  un- 
economic, it  may  in  certain  cases  turn  out  to  be  a  form  of  stand- 
ardization and  thus  not  without  justification.  Whether  it  is 
the  one  or  the  other  can  be  determined  only  after  a  careful 
scrutiny  of  each  individual  case.  The  most  progressive  unions 
are  now  uncompromising  foes  of  restriction,  welcoming  the  in- 
troduction of  new  and  better  methods  and  discouraging  careless 
and  inefficient  work. 

181.    Strikes 

Such  being  the  objects  of  labor  organization,  a  word  must 
be  added  as  to  the  means  utilized  to  secure  these  ends.  As 
militant  organizations  the  unions  employ  two  chief  methods, 
—  the  strike  and  the  boycott.  The  strike  or  concerted  stop- 
page of  work  depends  for  its  success  upon  the  ability  of  the 
strikers  to  prevent  others  from  taking  their  place.  This  has 
brought  them  into  conflict  with  the  law.  The  right  to  strike 
has  been  only  grudgingly  conceded.  At  first  the  courts  held 
all  strikes  illegal  as  conspiracies,  then  they  assumed  the  exist- 
ence of  malicious  intent,  next  they  endeavoured  to  distinguish 
between  various  kinds  of  motives,  especially  in  the  case  of 
"sympathetic"  strikes,  and  finally  they  are  now  tending  to 
discard  altogether  the  question  of  motive  and  to  uphold  the 


438  Labor  Problem  [§  181 

right  to  strike  as  such.  This,  however,  carries  with  it  the  right 
of  picketing.  When  picketing  assumes  the  form  of  peaceable 
persuasion  to  induce  others  to  refrain  from  working,  it  is  justi- 
fiable; when  it  degenerates  into  forcible  opposition,  disorder  and 
wanton  injury  to  body  or  property,  it  is  clearly  indefensible 
and  is  to  be  sternly  repressed. 

The  history  of  strikes  during  the  past  half-century  has  accen- 
tuated four  facts,  (i)  The  losses  to  the  strikers  have  been 
much  exaggerated.  The  permanent  gain  from  a  successful 
strike  often  outweighs  the  temporary  loss  of  all  strikes,  includ- 
ing the  failures.  The  real  injury  is  the  disarrangement  of 
industry  and  its  effect  on  the  consumer.  (2)  With  the  growth 
of  unionism  there  has  been  a  distinct  amelioration  in  the  con- 
duct of  strikes.  Violence  and  bloodshed  are  now  less  common 
than  formerly.  (3)  The  oldest  unions  approve  of  strikes 
only  as  a  last  resort;  but  when  once  entered  upon,  the  strike 
is  deemed  to  be  distinctly  more  advantageous  to  the  laborers 
than  was  the  case  in  former  decades.  Strikes  authorized  by 
the  central  bodies  are  now  both  more  infrequent  and  more 
successful  than  unauthorized  strikes.  Unionism  has  been,  on 
the  whole,  a  conservative  force.  (4)  The  outcome  of  a  strike 
is  largely  dependent  on  the  state  of  public  opinion,  and  the  strike 
itself  is  no  longer  held  to  be  a  matter  of  private  concern  as 
between  the  employer  and  the  workmen.  The  coal  strike  of 
1902  was  won,  and  the  New  York  Subway  strike  of  1905  was 
lost,  almost  entirely  because  the  issues  were  so  clear  that  the 
general  sentiment  favored  the  strikers  in  the  one  case  and  op- 
posed them  in  the  other.  The  table  opposite  page  438  shows 
some  results  of  strikes  in  the  United  States  from  1880  to  1900. 

The  lawlessness  that  has  often  attended  labor  disputes  has 
led  to  the  use  by  the  courts  of  injunctions  or  orders  to  specific 
persons  to  refrain  from  doing  specific  things.  The  peculiarity 
of  the  injunction  consists  in  the  fact  that  a  violation  of  the  writ 
exposes  the  guilty  party  to  any  punishment  that  the  court 
itself  may  choose  to  impose,  without  the  usual  protection  of 


RESULTS  OF  STRIKES  ORDERED  BY  LABOR 
ORGANIZATIONS,  AND  NOT  SO  ORDERED,   1881  TO  1900. 

BY  YEARS. 


YEARS 

PER  CENT  OF   ESTABLISHMENTS  IN  WHICH  STRIKES 
SUCCEEDED,  SUCCEEDED   PARTLY,    AND  FAILED. 

10         20        30        40        50        GO        70         80        90       100 

(   ORDERED 
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ED. 

§  iSi]  Strikes  439 

trial  by  jury.  Of  recent  years  tne  injunctions  issued  by  the 
courts  have  sometimes  been  so  sweeping  as  to  expose  them  to 
the  charge  of  subordinating  the  personal  rights  of  the  workmen 
to  the  property  rights  of  the  employer.  Several  efforts  conse- 
quently have  been  made  to  remove  all  suspicion  of  abuse  of 
what  is  properly  a  justifiable  process  by  restricting  the  indiscrim- 
inate use  of  such  injunctions  on  the  part  of  the  federal  judges. 
The  better  remedy,  however,  seems  to  lie  in  a  broader  economic 
training  of  the  judges  and  a  fuller  appreciation  on  their  part  of 
all  the  different  aspects  of  labor  disputes. 

The  most  recent  activity  of  American  unionism  cuimmates  m 
the  question  of  the  open  shop.  Originally  a  closed  shop  meant 
one  against  which  the  union  objected  and  perhaps  also  struck. 
When  the  strike  was  called  off,  the  shop  was  declared  open.  Now, 
however,  the  closed  shop  means  the  union  shop,  that  is,  the  shop 
which  is  closed  to  non-union  men;  the  open  shop  is  open  in  the 
sense  that  the  employer  may  engage  non-unionists.  Practically, 
however,  the  open  shop  has  become  a  shop  that  is  open  only  to 
non-union  men.  There  is,  however,  still  much  confusion  because 
of  the  failure  to  distinguish  between  a  closed  shop  and  a  closed 
union.  An  open  union  is  one  which  will  admit  any  competent 
man  into  its  ranks;  a  closed  union  is  an  indefensible  monopoly. 
No  one  can  uphold  a  closed  shop  with  a  closed  union;  the  real 
controversy  turns  on  the  question  of  the  closed  shop  with  an 
open  union.    That  is  the  true  problem  of  the  union  shop. 

In  many  cases  the  open-shop  question  plays  no  role  at  all, 
especially  (i)  where  the  agreements  are  made  not  with  the 
individual  employer,  but  with  an  association  of  employers, 
whereby  it  becomes  the  interest  of  each  to  prevent  any  infraction 
of  the  compact  by  his  competitor;  (2)  where  the  agreement  is 
made  not  only  for  the  union  men,  but  for  all  the  workmen,  so 
that  the  employer  can  secure  no  advantage  by  hiring  non-union 
men  at  lower  wages;  (3)  where  all  grievances  of  whatsoever 
nature  are  left  to  a  board  of  arbitration.  When  any  of  these 
conditions  is  absent,  as  in  the  building  trades  or  the  clothing 


440  Labor  Problem  [§  182 

industry,  it  is  difficult  for  an  open-shop  union  to  survive,  and 
the  institution  of  the  closed  shop  often  becomes  a  sine  qua 
noil  of  the  existence  of  the  union.  It  is  the  same  consideration 
which  explains  the  fact  that  in  some  cases  the  non-union  man 
is  regarded  with  indifference  and  that  in  others  he  becomes  a 
"scab"  or  "strike  breaker"  and  is  considered  a  traitor  or  ren- 
egade. In  such  cases  the  appeal  of  the  employer  to  the  sacred 
rights  of  individual  liberty  falls  on  deaf  ears,  because  the  work- 
man feels  that  the  real  liberty  of  his  class  is  a  result  of  associated 
action  and  that  association  here  depends  on  the  closed  shop. 
Whether  it  is  defensible  or  not  can  therefore  be  decided  only 
after  a  careful  consideration  of  the  particular  conditions.  That 
the  unions  sometimes  go  too  far  is  indubitable;  that  the  em- 
ployers' association  recently  formed  with  the  slogan  of  "liberty 
and  the  open  shop  "  is  equally  extreme  is  no  less  indisputable. 
The  real  test  in  both  cases  is  this:  is  the  union  standardizing 
rather  than  restricting  work,  and  is  the  closed  shop  necessary  to 
the  perpetuation  of  the  union? 

182.   Boycotts 

The  second  practice  of  modern  unionism  is  the  boycott  or  the 
attempt  on  the  part  of  the  workmen  to  cease  all  dealings  with 
the  employer  or  to  induce  third  parties  to  abandon  business 
dealings  with  him.  This  form  of  ostracism  is  of  a  hoary  anti- 
quity, although  its  modern  name  dates  from  the  ostracised  Irish 
land  agent  of  1880. 

In  its  negative  aspect  the  boycott  takes  the  form  of  the  union 
label,  which  guarantees  to  the  public  that  the  goods  have  been 
produced  under  conditions  approved  by  the  union,  or  of  the 
white  list,  which  contains  the  names  of  those  firms  especially 
recommended  because  they  adhere  to  union  conditions.  In 
its  positive  aspect  it  assumes  the  form  of  the  black  list  and  of 
the  boycott  proper.  The  name  "black  list,"  however,  is  gen- 
erally applied  to  the  action  of  the  employer  in  denouncing  som.e 
obnoxious  workman;    while  the  analogous  method  on  the  part 


§  i82]  Bo)^cotts  441 

of  the  workmen  is  termed  the  "unfair"  or  "we  don't  patronize" 
list,  usually  confined  to  the  publication  of  the  names  of  certain 
firms.  The  boycott  proper,  which  includes  the  unfair  list,  is 
either  primary,  secondary,  or  compound.  The  primary  boycott 
is  a  combination  of  persons  to  stop  business  dealings  with  any 
one.  The  secondary  boycott  is  a  combination  to  induce  or 
to  persuade  third  parties  so  to  abandon  business  dealings.  A 
compound  boycott  is  a  combination  to  coerce  or  to  intimidate 
rather  than  simply  to  induce  or  to  persuade,  the  efforts  in  ques- 
tion involving  either  technical  injury  or  actual  physical  force. 
Finally,  we  sometimes  hear  of  a  tertiary  boycott,  which  may  be 
declared  against  those  who  continue  to  purchase  at  stores  sell- 
ing "unfair"  supplies.  Most  of  the  important  boycotts  of 
recent  years  have  been  the  secondary  boycotts. 

American  boycotts  were  at  one  tirnie  of  considerable  signifi- 
cance. We  are  told  that  for  some  years  in  New  York  State  two- 
thirds  of  the  boycotts  were  successful.  During  the  end  of  the 
nineteenth  and  the  first  decade  of  the  twentieth  century,  however, 
the  general  tendency  of  x^merican  legislation  and  court  de- 
cisions has  been  against  the  legitimacy  of  the  secondary  boycott, 
for  two  reasons.  On  the  one  hand,  it  is  claimed  that  the  object 
is  illegal,  the  boycott  endeavoring  either  (a)  to  injure  others  in 
their  business  or  profession,  (b)  to  restrict  trade,  or  (c)  to  induce 
others  to  break  their  contract.  An  ancillary  argument,  often 
found,  is  that  the  injury  is  accompanied  by  malice  or  is  with- 
out justifiable  cause.  In  the  second  place,  it  is  claimed  that 
even  if  the  object  is  legal,  the  means  employed,  such  as  threats, 
coercion,  intimidation,  violence,  extortion,  or  misrepresenta- 
tion, are  illegal. 

More  recently  these  arguments  have  been  seriously  weakened 
by  the  criticism  of  economists  and  have  been  met  by  counter 
arguments  by  some  of  the  courts  themselves.  These  criticisms 
point  out  that  most  of  the  decisions  rest  on  the  old  doctrine  of 
conspiracy,  which  has  long  since  been  abandoned  in  England 
in  the  case  of  labor  disputes.     In  the  United  States  also  the  doc- 


^42  Labor  Problem  [§  182 

trine  has  disappeared  so  far  as  strikes  are  concerned,  and  there 
seems  no  good  reason  for  the  further  maintenance  of  a  distinc- 
tion in  this  respect  between  strikes  and  boycotts.  Attention 
is  also  called  to  the  fact  that  many  of  the  practices  proclaimed 
to  be  illegal  are  very  generally  employed  in  business  and  that 
the  mere  concerted  refusal  to  deal  with  others  violates  no  legal 
property  right.  The  doctrine  of  malice,  moreover,  is  objected 
to  as  liable  to  abuse  and  that  of  threat  and  coercion  is  declared 
to  have  been  seriously  exaggerated.  The  consequence  is  that 
the  courts  in  states  like  New  York,  California,  Montana,  and 
Missouri,  now  uphold  the  secondary  boycott,  in  the  three  former 
states  even  the  compound  boycott  being  declared  legal. 

In  positive  legislation,  however,  the  United  States  is  only 
just  beginning  to  follow  the  English  precedent.  In  1906  the 
Trade  Disputes  Act  passed  as  a  result  of  the  famous  Taff-Vale 
case,  virtually  legalized  boycotting  by  providing  that  "an  act 
done  in  pursuance  of  an  agreement  or  combination  by  two  or 
more  persons  shall,  if  done  in  contemplation  or  furtherance  of 
a  trade  dispute,  not  be  actionable,  unless  the  act,  done  without 
any  such  agreement  or  combination,  would  be  actionable." 
This  position  is  strengthened  by  the  provision  that  no  suit  for 
damages  against  a  trade  union  or  its  members  for  an  injury 
committed  in  behalf  of  the  union  shall  be  entertained  by  court. 
The  consequence  is  that  a  boycott,  so  long  as  it  does  not  involve 
the  committing  of  certain  specifically  prohibited  acts,  is  not 
actionable,  either  civilly  or  criminally.  All  the  legal  points 
which  still  play  such  a  role  in  the  majority  of  the  American 
courts  were  thus  virtually  eliminated  from  the  problem.  The 
only  commonwealths  in  the  United  States  which  up  to  1914  had 
followed  the  new  English  law  were  California  and  Maryland. 
There  is  every  reason  to  believe,  however,  that  the  old  doctrine 
of  conspiracy  will  soon  become  as  inapplicable  to  boycotts  as 
it  has  now  become  to  strikes. 

The  most  serious  obstacle  to  the  use  of  boycotts  in  recent 
years  came  from  the  attempt  in  the  famous  Danbury  Hatters 


§  iS3  ]     Profit  Sharing  and  Co-operation     443 

case  to  apply  to  labor  unions  the  federal  anti-trust  law  of  1890. 
In  1914,  however,  the  Clayton  anti-trust  law  specifically  exempted 
trade  unions  frotn  the  operation  of  the  act,  so  that  the  illegahty 
of  boycotts,  if  maintained,  will  hereafter  probably  depend  upon 
the  appHcation  of  the  common  law  or  of  state  statute. 

An  interesting  problem  is  raised  by  the  question  as  to  what 
the  result  will  be  if  the  boycott  comes  to  be  generally  legalized 
as  the  strike  now  is.  That  there  is  danger  of  abuse  in  the  one 
case  as  in  the  other,  is  undoubted;  but  the  dangers  of  abuse  are 
overbalanced  by  the  social  dangers  of  prohibition.  The  same 
arguments  that  are  now  made  against  boycotts  were  formerly 
made  against  strikes.  Nor  does  the  experience,  on  the  one  hand, 
of  England,  or  on  the  other  hand  of  New  York  and  the  other 
states  where  boycotts  have  been  virtually  legaHzed,  disclose 
any  great  risk  of  tyrannical  use  of  the  boycott.  It  is  not  un- 
reasonable to  believe  that  when  once  the  boycotts  are  legalized, 
as  is  now  the  case  with  strikes,  the  history  will  be  largely  the 
same,  and  that  the  unions  will  feel  the  increased  responsibility 
which  comes  with  greater  power.  The  use  of  boycotts  will 
then  probably  become  more  and  more  sparing,  and  if  serious 
abuses  disclose  themselves,  there  will  be  ample  time  to  remove 
them  by  proper  legislation. 

183.  Profit  Sharing  and  Co-operation 

While  wages  constitute  the  ordinary  method  of  recompense 
to  the  laborer,  there  are  two  other  possible  systems  of  industrial 
remuneration.  The  one  known  as  co-operation  rests  on  the 
ehmination  of  the  capitalist  as  distinct  from  the  laborer;  the 
other,  which  retains  the  capitalist  but  involves  the  participation 
of  the  laborer  in  the  outcome  of  the  enterprise,  is  popularly, 
although  inaccurately,  called  profit  sharing. 

We  say  inaccurately,  because  the  method  of  participation  is 
found  in  three  forms,  —  as  a  substitute  for  the  wages  system,  as 
an  adjunct  to  the  wages  system  and  as  a  modification  of  the 
wages  system.     The  first  is  technically  called  product  sharing, 


444  Labor  Problem  [§  183 

the  second  is  known  as  gain  sharing,  while  the  third  is  the  real 
profit  sharing  or  industrial  partnership. 

(i)  The  principal  example  of  product  sharing  is  seen  in 
farming  and  is  known  as  the  metayer  method  or  share  system. 
The  one  party  supplies  the  land  and  occasionally  additional  cap- 
ital, the  other  furnishes  the  labor;  and  the  product  is  divided. 
We  call  it  a  substitute  for  the  wages  system,  because  the  remu- 
neration of  the  tenant  is  not  a  stipulated  wage  but  is  contingent 
on  the  produce.  Outside  of  agriculture,  the  chief  instance  is 
that  of  the  fishing  industry.  In  the  Gloucester  fisheries,  for 
instance,  when  the  capitalist  provides  the  vessel,  food  and  gear- 
ing, the  "catch"  after  deducting  the  "trip  charges"  (i.e.  the 
cost  of  the  ice,  barrels  and  water)  is  divided  equally  between 
the  ship-owner  and  the  crew.  This  is  "sharing  on  halves"  or 
the  "half  lay."  When  the  crew  furnishes  the  gear  and  provisions 
as  well,  they  get  three  quarters  of  the  catch,  and  the  system  is 
called  "sharing  on  the  quarter,"  or  the  "quarter  lay."  Some- 
times the  "fifth  lay"  is  found.  In  seine  fishing  all  of  the  crew 
share  equally;  in  other  cases  the  share  of  each  is  apportioned 
according  to  his  catch.  The  fishermen  prefer  this  to  fixed  wages, 
because  of  the  intimate  relation  of  reward  and  effort.  When 
the  fish  are  sighted,  the  most  unremitting  energy  is  neces- 
sary, and  the  men  are  unwilling  to  expose  their  rate  of  pay  to 
the  hazard  of  the  lazy  or  inefficient  wage-earner.  The  capi- 
tahst  also  favors  the  system,  because  it  augments  his  profits. 
Another  example  of  product  sharing  is  the  system  of.  tribute  " 
still  found  in  the  Cornish  mines,  where  each  pitch  "  is  let 
out  to  that  group  of  miners  who  agree  to  work  the  ground 
for  the  lowest  sums  per  pound  on  the  agreed  values  of  the  ore. 
In  all  such  cases  of  product  sharing  the  earnings  of  the  laborers 
depend  entirely  on  the  results  of  their  own  efforts,  not  on  the 
profits  of  the  capitalist.  Where  the  value  of  the  product  is 
dependent  on  the  skill  of  the  entrepreneur,  as  in  ordinary  in- 
dustry, product  sharing  is  inapplicable. 

(2)   The  next  form  of  participation   recognizes   the   perma- 


§  183]     Profit  Sharing  and  Co-operation       445 

nence  of  the  wage-earner,  but  awards  him  an  added  compen- 
sation as  an  incentive  to  better  work.  This  also  is  really  not 
profit  sharing,  because  the  extra  sum  is  independent  of  actual 
profits  and  must  be  paid  whether  profits  accrue  or  not.  It  is 
called  gain  sharing  "  because  both  employer  and  wage-earner 
share  in  the  increased  gains  that  are  presumed  to  ensue.  Some- 
times it  is  called  the  system  of  the  "  progressive  wage,"  or  the 
"  premium  payment,"  or  the  "  bonus  plan,"  or,  as  in  England, 
the  reference  rate  "or  '  good-fellowship  "  system.  While  a 
few  such  experiments  have  met  with  success,  they  have  not  on  the 
whole  commended  themselves  to  the  American  workman.  For 
since  the  bonus  plan  is  based  upon  a  minimum  wage  with  a 
premium  in  certain  cases,  the  average  unionist  fears  that  what 
may  be  gained  by  some  as  a  bonus  will  be  more  than  lost  by  a 
reduction  of  the  minimum.  He  prefers  to  raise  the  standard 
rate  for  all,  rather  than  to  increase  the  premium  for  some. 

(3)  The  final  plan  of  participation  leaves  untouched  the  rate 
of  wages,  but  modifies  the  labor  contract  by  granting  to  the  work- 
man some  participation  in  the  actual  profits  of  the  business.  The 
laborer  here  receives  not  only  wages  but  profits,  and  the  sys- 
tem is  hence  properly  called  profit  sharing.  The  division  can 
be  accomplished  either  by  an  annual  cash  dividend,  or  by  a  de- 
ferred participation  in  some  provident  fund  or  annuity,  or  by 
the  distribution  of  shares  in  the  stock  of  the  corporation.  The 
objects  of  such  a  system  are  in  the  highest  degree  commend- 
able, both  as  leading  to  increased  efficiency  and  as  conducing 
to  industrial  peace.  But  here  again  experience,  especially  in 
America,  has  shown  that  the  system  possesses  only  a  limited 
efficacy.  The  difficulties  are  fourfold:  (a)  it  requires  a  pecul- 
iarly broad-minded  employer;  (b)  it  presupposes  a  set  of  work- 
men who  are  at  once  so  shiftless  that  they  are  not  doing  their 
whole  duty,  and  so  intelligent  that  they  realize  the  advantages 
of  the  inducement  to  more  strenuous  work;  (c)  it  assumes  the 
existence  of  profits,  whereas  the  majority  of  business  enterprises 
incur  losses;    (d)  it  complicates  the  wage  contract  by  introdu- 


446  Labor  Problem  [§  184 

cing  another  possible  element  of  dispute  in  the  ascertainment 
and  adjustment  of  profits. 

While  all  these  forms  of  participation  rest  on  the  continued 
existence  of  the  capitalist,  the  system  of  industrial  co-operation 
attempts  to  eliminate  the  capitalist  by  uniting  in  the  same  in- 
dividual the  functions  of  laborer,  capitalist  and  entrepreneur. 
In  communities  where  large  department  stores  are  infrequent, 
distributive  co-operation  or  so-called  co-operative  stores  may 
be  of  some  advantage  to  the  consumer.  In  countries  or  sections, 
where  credit  facilities  are  backward,  co-operative  banks  or 
credit  associations,  especially  in  agricultural  districts,  like  the 
Schulze-Delitsch  or  Raiffeisen  banks  in  Germany  and  elsewhere, 
may  achieve  some  measure  of  success.  In  special  cases  a  system 
of  co-operative  credit,  like  our  Building  and  Loan  Associations, 
may  subserve  a  useful  purpose.  But  as  an  attempt  to  replace 
the  wages  system  or  as  a  general  scheme  of  social  regeneration, 
productive  co-operation  has  been  attended  with  insignificant 
results  elsewhere  and  with  almost  complete  failure  in  the  United 
States.  The  reasons  that  usually  militate  against  success  are 
fivefold:  (i)  the  lack  of  adequate  initial  capital;  (2)  the  scarcity 
of  organizing  ability;  (3)  the  unreadiness  of  the  average  member 
to  pay  a  salary  sufficient  to  retain  the  exceptional  manager; 
(4)  the  mutual  distrust  and  the  absence  of  the  true  co-opera- 
tive spirit;  (5)  the  danger,  in  case  of  success,  of  conversion  into 
the  customary  profit-making  corporation.  With  human  nature 
as  it  still  is  found  in  the  ordinary  man,  co-operation  is  even  less 
than  profit  sharing  a  social  panacea  or  an  immediately  practi- 
cable means  of  escape  from  modern  industrial  evils. 

184.   Arbitration  and  Conciliation 

The  economist  who  is  to  be  of  any  service  to  the  statesman 
must  therefore  recognize  human  nature  as  he  finds  it.  The 
avenue  to  industrial  peace  must  be  sought  on  the  basis  of  exist- 
ing industrial  methods.  While  the  enthusiastic  idealists  have 
been  pursuing  the  will-of-the-wisp  of  socialism  and  co-operation, 


§  184]         Arbitration  and  Conciliation         447 

the  long-headed  practical  men  have  elaborated  working  schemes 
of  slow  and  steady  progress.  These  rest  on  the  frank  recog- 
nition by  both  parties  of  the  utility  of  collective  or  group 
bargaining. 

Labor  disputes  may  be  adjusted  before  or  after  the  differ- 
ences have  reached  a  climax.  If  a  strike  or  lockout  has  been 
declared,  it  is  difficult  to  allay  the  feelings  of  excitement  or 
resentment.  In  industry  as  in  politics  it  is  harder  to  restore 
peace  than  to  preserve  it.  This  is,  however,  a  lesson  that  is 
learned  with  difiiculty.  In  early  communities  peace  {pax) 
is  the  short-lived  compact  to  cease  from  normal  hostility;  in 
civilized  nations  the  normal  state  of  peace  rests  on  mutual  regard 
and  readiness  to  make  mutual  concessions. 

In  the  early  stages  of  the  factory  system  the  employer  re- 
fused to  recognize  any  but  the  individual  workman;  in  the  next 
stage  he  was  willing  to  deal  with  representatives  of  his  own  work- 
ing force;  at  present  he  generally  concedes  the  wisdom  of  trans- 
acting business  with  the  union  as  a  whole.  At  first  the  work- 
man granted  the  employer  short  shrift  and  strikes  were  bitter 
and  violent;  as  the  unions  became  more  powerful  they  were 
sobered  by  responsibility;  and  now  in  many  cases  their  chief 
function  consists  in  averting  strikes  and  adjusting  disputes. 
In  industry  as  in  politics  war  is  stiU  a  last  resort,  but  in  those 
occupations  where  strikes  have  become  the  exception  rather 
than  the  rule,  the  result  is  due  chiefly  to  the  elaboration  of  the 
so-called  trade  agreement.  The'  system  of  conciliation  is  one 
of  joint  conference;  and  it  succeeds  best  where  not  only  the 
employees  but  the  employers  are  organized.  The  employers' 
associations,  like  the  trade  unions,  are,  especially  in  their  early 
years,  often  intolerant,  vindictive  and  short-sighted.  But 
experience  happily  shows  that  the  mere  habit  of  conference 
between  representatives  of  both  parties  tends  to  dispel  distrust, 
to  allay  animosity  and  to  engender  those  feelings  of  mutual 
respect  which  are  the  surest  guarantee  of  peace.  In  the  United 
States,  which  began  to  tread  the  path  of  trade  agreements  at 


44^  Labor  Problem  [§184 

a  somewhat  later  date  than  England,  recent  years  have  witnessed 
a  great  strengthening  of  the  movement  toward  shop  councils 
and  a  greater  participation  of  the  laborers  in  the  management 
of  the  enterprise,  thus  paving  the  way  for  a  real  democracy  of 
industry. 

If  the  dispute  has  come  to  a  head,  the  attempt  at  adjudi- 
cation is  commonly  called  arbitration.  The  usage,  however,  is 
not  uniform,  for  in  many  cases  the  arbiter  or  the  board  of  arbi- 
tration succeeds  in  compounding  the  difi&culties  before  they 
reach  an  acute  stage.  In  the  absence  of  an  effective  machinery 
within  the  trade,  government  often  steps  in.  When  it  simply 
tenders  its  -good  offices  through  a  system  of  voluntary  arbitra- 
tion, as  in  many  of  the  American  states,  its  success  is  not 
conspicuous.  When  it  endeavors  to  force  the  contestants  to 
come  to  terms,  as  in  the  Australian  systems  of  compulsory 
arbitration,  the  danger  is  that  an  authoritative  arbitrament 
may  rob  the  one  or  the  other  party  of  the  freedom  to  develop 
a  cherished  ideal  that  may  be  necessary  to  its  own  successful 
growth.  Yet  here  again  the  interests  of  the  part  must  be 
subordinated  to  those  of  the  whole,  and  the  final  test  must  be 
the  welfare  of  the  community.  Where  labor  disputes  and 
strikes  result  in  a  wanton  and  widespread  social  injury,  as 
in  the  Chicago  strike  of  1894,  the  coal  strikes  of  1902  in  Penn- 
sylvania and  of  191 2  in  Great  Britain,  and  the  Colorado  strike  of 
1914,  the  public  will  sooner  or  later  insist  on  some  form  of  settle- 
ment. Voluntary  conciliation  through  trade  agreement  is  the 
method  best  suited  to  the  temper  and  tradition  of  the  American 
people,  and  is  fortunately  making  rapid  progress.  But  no  amount 
of  reliance  on  the  "sacred  right  of  free  contract"  will  in  the  long 
run  prevent  society  from  asserting  its  paramount  claims  to  the 
maintenance  of  industrial  peace.  No  community  will  perma- 
nently brook  opposition  to  these  plain  dictates  of  self-preserva- 
tion and  social  progress. 


Book  IV 
Value  and  Exchange  '^ 


CHAPTER  XXVHI 

MONEY,  NATURE  AND  VALUE 

185.   References 

"W.  S.  Jevons,  Money  (1879),  chs.  i-xvi,  xxv-xxvi;  J.  F.  Johnson' 
Money  and  Currency  (n.  d.,  1905),  chs.  i-viii;  J.  S.  Mill,  Principles, 
bk.  iii,  chs.  vii-x;  C.  ]SI.  Walsh,  Measurement  of  Exchange  Value  (1901), 
chs.  iii,  vi-xii;  E.  W.  Kemmerer,  Money  and  Credit  Instruments  in  their 
Relation  to  General  Prices  (1907) ;  D.  Kinlej-,  Moi:ry  (1904),  chs.  v-x;  W 
Ridgeway,  The  Origin  of  Metallic  Currency  (1892);  J.  L.  Laughlin, 
The  Principles  of  Money  (1903);  I.  Fisher,  The  Purchasing  Poicer  of 
Money  (19 n);  Hartley  "Withers,  The  Meaning  of  Money  (1909);  C.  A 
Corant,  The  Principles  of  Money  cud  Banking  (1905),  vol.  i;  W.  C 
Mitchell,  Cold,  Prices  and  Wages  under  the  Grccnbark  Standard  (1908) 
W.  T.  Lay  ton,  An  Introduction  to  the  Study  of  Prices  (1920);  Sir  D 
Barbour,  The  Influence  of  the  Cold  Supply  on  Price^  and  Profits  (1913) 
E.  Cannan,  Money,  Its  Connection  with  Rising  and  Falling  Prices  (191 8). 

Index  Numbers.  The  London  Economist,  March,  1864,  with  Annual 
Supplements;  A.  Sauerbeck,  in  Journal  Stalisticai  Society  (xlix,  1886, 
Ivi,  1893,  and  following  years,  continued  after  1913  by  Sir  G.  Paish); 
R.  P.  Falkner,  in  Senate  (Aldrich)  Report  on  Wholesale  Prices.  I  (1893); 
Bulletin  of  the  Dcparl>iient  [now  Bureau]  of  Labor,  no.  39  (1902),  no.  45 
(1903),  and  in  two  separate  Bulletins  (for  wholesale  and  for  retail  prices) 
annually  thereafter  to  the  present;  British  Report  on  M'holesale  and  Retail 
Prices,  with  charts  from  1801  tol903,  continued  to  date  in  the  Board  of 
Trade  Labour  Gazette,'  F.  Y.  Edgeworth,  Memoranda  on  the  Best  Methods 
of  Ascertaining  and  Measuring  Variations  in  the  Value  of  the  Monetary 
Standard  (British  Association  Report  1887-1889);  C.  M.  Walsh,  The 
Fundamental  Problem  in  Monetary  Science  (1903)  and  The  Problem  of 
Estimation  (1921);  W.  C.  Mitchell,  Business  Cycles  (1913),  ch.  iv.;  and 
Index  Numbers  of  Wholesale  Prices  in  the  Bulletin  of  the  Bureau  of  Labor 
Statistics,  no.  173  (1915);  I.  Fisher,  Stabilizing  the  Dollar  (1920). 

186.   Origin  and  Functions  of  Money 

The  fundamental  uses  of  money  are  to  serve  as  a  medium  of 
exchange  and  to  act  as  a  measure  of  value.     Which  of  these 

449 


45°  Money,  Nature  and  Value  [§  i86 

was  the  earlier  is  uncertain  as  well  as  unimportant.  As  soon 
as  the  difficulties  of  an  extensive  barter  disclosed  themselves, 
the  employment  of  a  commodity  for  the  one  purpose  implied 
its  use  for  the  other.  Value  in  business  life  is  exchange  value; 
when  we  express  exchange  values  of  all  other  commodities  in 
terms  of  one,  we  do  so  with  the  implication  that  they  are  con- 
tinually being  exchanged  for  it,  and  when  they  are  so  exchanged, 
their  relative  value  is  necessarily  measured  by  it. 

The  fundamental  utility  of  money,  therefore,  is  its  accepta- 
bility or  exchangeability.  Every  commodity  indeed  will  be 
accepted  by  those  who  want  it,  but  not  by  those  w-ho  have  no 
present  use  for  it,  and  who  are  uncertain  as  to  their  ability  to 
dispose  of  it  on  advantageous  terms.  All,  however,  are  willing 
to  take  money,  because  they  know  that  there  is  no  doubt  of 
their  being  able  to  pass  it  on.  Ordinary  commodities  have  a 
more  or  less  limited  acceptability;  money  is  the  one  thing 
that  possesses  general  acceptability. 

The  secondary  functions  of  money  are  three  in  number:  (i) 
Money  is  a  standard  of  deferred  payments.  When  we  speak 
of  money  as  a  measure  of  value  we  refer  to  values  of  commod- 
ities at  a  given  moment.  If,  however,  we  lend  something 
for  a  term  of  years,  it  is  important  that  what  is  repaid  by  the 
borrower  should  leave  us  as  far  as  possible  in  the  same  relative 
position  as  before.  (2)  INIoney  is  a  store  of  value.  If  we  wish 
to  lay  by  a  fund  of  wealth,  it  is  important  that  when  we  want 
it  again  we  shall  be  able  to  find  it  intact.  Nowadays,  however, 
this  function  of  money  is  quite  subsidiary:  instead  of  putting 
the  coin  into  our  stockings,  we  place  it  in  the  bank;  instead  of 
hanging  our  gold  and  silver  about  our  wives  or  children,  we 
invest  it  and  receive  interest.  (3)  Money  is  used  nowadays  as 
a  reserve  for  credit  operations.  Considerable  sums  must  be 
kept  seemingly  idle  when  they  really  serve  a  most  important 
function  as  a  basis  for  credit  transactions. 

Historically  almost  every  imaginable  commodity  has  been 
used  for  money.     Whatever  happened  to  be  common  and  at 


§  i86]  Functions  of  Money  451 

the  same  time  widely  wanted,  served  as  money.  Articles  of 
food  like  rice,  dried  fish,  olive  oil,  nuts,  wheat,  maize,  tea,  salt, 
dates,  tobacco,  and  whiskey;  weapons  like  knives,  fire-arms, 
sword-hilts,  powder  and  shot;  implements  like  hoes,  shovels, 
and  common  utensils;  clothing  made  of  wood,  cotton,  leather, 
skins,  pelts,  and  furs;  animals  such  as  sheep,  horses,  and  oxen; 
ornaments  like  beads,  shells,  ivory  tusks,  fish  teeth,  and  feathers; 
and  metals  like  iron,  lead,  tin,  copper,  and  bronze  have  been 
employed  at  one  time  or  another.  Beginning  in  Lydia  and 
^gina  in  classic  antiquity,  silver  and  gold  were  finally  selected 
in  every  developed  community  to  receive  the  government  stamp 
as  minted  or  coined  money,  because  they  possess  in  a  peculiar 
degree  the  attributes  of  transportability,  divisibility,  homo- 
geneity, great  value  in  small  bulk,  durability,  recognizability, 
stability,  and  adaptability  to  coinage  through  fusibility,  ductil- 
ity, and  malleability. 

Money  may  be  classified  in  three  ways,  —  as  actual  and 
ideal  money,  as  metallic  and  paper  money,  as  standard  and 
token  money. 

(i)  Actual  money  is  that  which  actually  circulates.  Ideal 
money  or  money  of  account  is  that  in  which  accounts  are  kept. 
Its  use  may  be  due  to  necessity  or  to  habit.  In  the  middle  ages, 
when  actual  money  was  continually  tampered  with,  the  con- 
tinental merchants  were  compelled  to  keep  accounts  in  scudi, 
which  were  not  coined.  Guineas  are  to-day  unknown  in  Eng- 
land and  shillings  in  America;  yet  sales  are  often  effected  in 
Great  Britain  in  guineas  instead  of  pounds,  and  in  the  rural 
districts  of  the  Atlantic  seaboard  transactions  frequently  take 
place  in  shillings  in  lieu  of  dollars. 

(2)  Paper  money  as  opposed  to  metallic  money  may  be  sub- 
divided into  three  classes,  —  representative,  fiat,  and  fiduci- 
ary money.  Representative  money  consists  of  paper  which 
certifies  that  an  equivalent  amount  of  coin  or  bullion  is  depos- 
ited in  the  government  treasury,  like  the  American  gold  and 
silver  certificates.     Fiat  money  consists  of  paper  whose  value 


452  Money,  Nature  and  Wlue  [§  i86 

rests  on  the  fiat  or  declaration  of  the  government,  like  the 
American  greenbacks.  Fiduciary  or  credit  money  consists  of 
promises  issued  by  private  or  semi-private  institutions  to  pay 
coin,  like  the  national  bank  notes. 

(3)  Standard  money  is  money  which  is  legal  tender  for  all 
debts  and  used  as  the  standard  to  which  the  value  of  all  other 
money  is  referable.  Token  or  subsidiary  money,  on  the  other 
hand,  consists  of  coin  whose  legal  or  mint  value  exceeds  that  of 
the  bullion,  and  whose  coinage  is  not  free,  in  the  sense  that  no 
private  individual  is  at  liberty  to  demand  that  the  government 
exchange  his  bullion  for  coins. 

In  the  United  States  the  standard  is  the  gold  dollar  of  25.8 
grains  standard  and  23.22  fine,  although  it  is  no  longer  coined.^ 
An  ounce  of  standard  gold  is  coined  into  $18. 6c^;  of  fine  gold 
into  $20,675.  On  May  i,  1919,  there  were  in  the  United  States 
$3,092,430,916  of  gold  coin  and  bullion. 

Originally  the  silver  dollar  was  also  standard  money,  and 
was  in  fact  the  only  coin  issued  under  the  name  of  "dollar," 
a  corruption  of  the  German  Thaler,  abbreviated  from  Joa- 
chimsthaler  or  silver  coin  issued  in  the  sixteenth  century  by  a 
petty  Bohemian  potentate  in  Joachimsthal  {i.e.  St.  James' 
dale).  In  1792  the  silver  dollar  was  fixed  at  3715  grains  pure, 
or  416  grains  standard  silver.  In  1837  the  weight  of  the  dollar 
was  reduced  to  41 2^  grains.  This  was  henceforth  known  as 
the  standard  dollar,  the  previous  coin  being  later  on  colloquially 
termed  the  "dollar  of  the  fathers."  The  coinage  of  the  "stand- 
ard dollar"  was  discontinued  in  1873,  but  again  authorized  in 
1878,  although  now  without  free  coinage  and  only  in  exchange 
for  a  limited  quantity  of  bullion  purchased  by  the  government. 
In  1890  it  was  provided  that  the  silver  dollar  should  be  coined 
only  when  necessary  to  redeem  the  treasury  notes  issued  under 
that  law.  The  further  issue  of  treasury  notes,  however,  was 
suspended  in  1893,  and  with  their  gradual  retirement  the  need 

^  Souvenir  gold  dollars  were  coined  for  the  St.  Louis  and  Portland 
expositions. 


§  iSy]  Value  of  Money  453 

of  more  silver  dollars  diminished,  until  with  their  disappearance 
the  coinage  of  the  silver  dollars  came  to  an  end  in  1904.  The 
outstanding  silver  dollars  are  hence  now  in  fact,  although  not 
in  name,  subsidiary  or  token  money,  because  since  the  fall  in 
the  price  of  silver  their  face  value  is  far  superior  to  their  bullion 
value,  because  since  1873  there  is  no  free  coinage  of  silver,  and 
because  since  1878  the  silver  dollars  are  legal  tender  only  if 
not  otherwise  stipulated,  and  not  legal  tender  at  all  for  the 
redemption  of  the  gold  certificates.  On  May  i,  1919,  there 
were  in  the  United  States  311,018,930  "standard"  silver  dollars.^ 
The  other  coins  of  the  United  States  are  what  in  official 
language  are  designated  as  "subsidiary  silver"  and  "minor" 
or  "token"  coins.  On  May  i,  1919,  there  was  in  the  United 
States  a  stock  of  $243,896,606  of  "subsidiary"  silver.  The 
"minor"  or  "token"  coins  were  originally  of  copper.  They 
are  at  present  a  five-cent  nickel  and  a  one-cent  bronze  coin, 
each  legal  tender  up  to  25  cents. 

187.   Value  of  Money 

The  value  of  money  is  its  purchasing  power,  and  can  be 
learned  only  from  the  general  level  of  prices.  Prices  of  single 
commodities  may  rise  or  fall  because  of  relative  variations  in 
the  forces  which  affect  particular  demand  and  supply.  But 
there  can  be  no  change  in  the  prices  of  all  commodities  unless 
there  is  a  corresponding  change  in  the  value  of  money. 

The  value  of  money,  like  that  of  everything  else,  is  an  ex- 
pression of  its  marginal  utility.  The  important  point,  then,  is 
the  location  of  the  margin.  The  marginal  increment  is  obvi- 
ously affected   not    only  by  the    number   of    increments  —  the 

1  For  a  few  years  we  also  had  a  "trade  dollar."  The  law  of  1873 
authorized  the  coinage  of  a  heavy  silver  dollar  (420  grains),  which  it  was 
supposed  might  be  used  in  the  Orient.  It  was  legal  tender  only  to  $5. 
In  1876  the  legal  tender  quality  was  abrogated  and  the  coinage  was  lim- 
ited. In  1878  the  further  coinage  was  prohibited  except  for  "proof 
pieces,"  and  in  1887  pro\'ision  was  made  for  retiring  the  outstanding 
issue.     The  total  issue  was  $35,965,924. 


454  Money,  Nature  and  Value  [§  187 

supply  —  but  by  the  amount  of  the  work  to  be  done  —  the 
demand. 

Taking  up  first  the  demand  for  money,  it  is  clear  that  we 
must  not  confuse  this  with  the  demand  for  the  commodity 
used  as  money.  Gold  and  silver,  for  instance,  are  used  also 
as  ornaments  and  in  the  arts  and  manufactures.  The  value  of 
the  precious  metals  is  therefore  afTected  by  the  non-monetary 
demand,  or  as  it  is  sometimes  called,  the  industrial  consump- 
tion. Confining  ourselves,  however,  to  the  monetary  demand 
proper,  we  must  call  attention  to  a  widespread  fallacy.  It  is 
sometimes  said  that  money  differs  from  other  things  in  that 
the  more  of  anything  else  we  have,  the  less  we  want,  while  the 
more  money  we  have,  the  more  we  want.  This  confuses  money 
with  general  purchasing  power  or  wealth.  Everything  salable 
has  purchasing  power.  If  we  say  that  the  more  money  a  man 
has,  the  more  he  wants,  we  can  equally  well  say  that  the  more 
wheat  he  has,  the  more  he  wants.  Yet  no  one  would  claim 
that  the  demand  for  wheat  is  for  this  reason  unlimited.  The 
demand  for  money  is  in  fact  even  more  limited  and  definite 
than  that  of  most  commodities.  Wheat  can  be  used  for 
either  consumption  or  exchange;  but  while  gold  can  be  em- 
ployed in  industry,  its  use  as  money  is  primarily  for  exchange. 
The  chief  use  of  an  ordinary  commodity  is  to  consume  it;  the 
chief  use  of  money  is  to  part  with  it.  What  the  owner  really 
wants  is  wealth,  not  money. 

Since  the  fundamental  function  of  money  is  to  serve  as  a 
medium  of  exchange,  the  demand  for  money  can  be  recognized 
primarily  in  the  volume  of  business.  Here  we  meet  another 
common  error.  It  is  often  said  that  the  value  of  money  is 
measured  by  the  total  amount  of  commodities  in  existence. 
The  real  or  effective  demand  for  money  is  measured  by  the 
commodities  actually  sold.  To  ascertain  this  demand  it  would 
be  necessary  to  compute  the  exact  volume  of  all  cash  trans- 
actions at  a  given  moment.  Money,  however,  is  needed  also, 
as  we  have  seen,  as  a  reserve  and  as  a  store  of  value.     We  should, 


§  iSy]  Value  of  Money  455 

therefore,  have  to  add  to  the  amount  required  for  making  actual 
exchanges  the  sums  needed  as  reserves  by  the  banks  or  govern- 
ments and  the  amount  deemed  necessary  to  be  kept  as  cash  in 
the  pockets  of  the  people  and  in  the  tills  of  the  merchants.  If 
it  were  possible  to  arrive  at  any  accurate  computation  of  these 
three  facts  we  should  know  the  entire  demand  for  money. 

There  is  one  other  point  in  which  the  demand  for  money 
differs  from  that  for  other  things.  In  ordinary  commodities 
the  demand  is  composed  of  three  parts:  the  demand  for  im- 
mediate consumption,  the  demand  for  a  reserve  stock  to  be 
utilized  in  the  near  future,  and  the  demand  for  more  distant 
wants  or  for  a  stock  "held  for  a  rise."  In  the  case  of  money, 
however,  there  is  no  potential  or  visible  supply  of  money,  and 
no  stock  that  is  held  for  a  rise.  People  do  not  speculate  in 
money  because  there  are  no  changes  in  the  price  of  money; 
because  in  fact  money  has  no  price.  Changes  in  the  value,  or. 
purchasing  power,  of  money  express  themselves,  not  in  any 
visible  change  in  money  itself,  but  in  the  prices  of  commodities. 

We  have  thus  far  spoken  only  of  cash  transactions.  In  con- 
sidering the  use  of  money  as  a  medium  of  exchange,  however, 
we  must  not  overlook  the  fact  that  many  exchanges  are  made 
through  the  medium  of  credit.  The  study  of  credit  must  be 
postponed  to  a  later  chapter;  but  we  may  anticipate  the  con- 
clusions by  stating  that  credit  tends  to  lessen  the  demand  for 
money,  and  thus  to  raise  prices.  The  strength  of  the  ten- 
dency depends  on  the  degree  of  the  actual  economy  in  the  use 
of  cash. 

Changes  in  the  monetary  demand,  and  therefore  to  that  ex- 
tent in  the  level  of  prices,  consist  of  changes  in  the  four  points 
just  mentioned:  in  the  volume  of  business,  in  the  amount  of  the 
bank  reserves,  in  the  quantity  of  hand-to-hand  or  till  money, 
and  in  the  use  of  credit  devices.  Of  these  the  second  and  fourth 
will  be  discussed  later,  while  the  third  is  commonly  of  slight 
importance. 

The   demand    for   money  as   a   medium   of   exchange,    how- 


45^  Money,  Nature  and  Value  [§  187 

ever,  which  is  the  most  important  constituent  in  the  demand, 
obviously  fluctuates  with  the  extent  of  business  transactions. 
With  the  warning  that  we  must  be  careful  not  to  confuse  the 
volume  of  exchanges  with  the  volume  of  production,  it  might  be 
affirmed  that,  as  an  increase  of  business  means  a  greater  volume 
of  transactions,  the  tendency  will  be  toward  a  greater  monetary 
demand,  a  rise  in  the  value  of  money  and  a  fall  in  general  prices. 
In  actual  life,  however,  this  tendency  may  be  completely  out- 
weighed by  countervailing  tendencies.  For  in  the  first  place, 
the  increasing  monetary  demand  will,  as  we  shall  see,  ordinarily 
lead  to  an  increasing  supply,  so  that  the  price  level  may  be  only 
temporarily  aft'ected.  Secondly,  the  augmented  volume  of  busi- 
ness will  probably  be  attended  by  an  extension  of  credit,  so  that 
the  result  may  be  for  quite  a  protracted  period  a  rise,  instead  of 
a  fall,  in  prices.  Since  credit,  however,  always  bears  some 
relation  to  the  supply  of  money,  more  business  will  in  the  long 
run  require  more  money,  if  the  price  level  is  to  be  maintained. 

In  short,  the  demand  for  money,  like  the  demand  for  most 
things,  is  subject  to  all  manner  of  subtle  and  unforeseen  fluctu- 
ations. But  however  changeable  and  unpredictable  the  de- 
mand, it  is  obviously  one  of  the  two  factors  which  fix  the  value 
of  money  or  the  general  level  of  prices. 

Coming  now  to  the  monetary  supply  and  assuming  that  the 
quantity  of  money  at  a  given  time  is  known,  it  may  be  asked: 
what  effect  do  changes  in  the  supply  produce  on  the  value  of 
money  or  the  level  of  prices?  This  question  cannot  be  answered 
without  taking  account  of  the  rapidity  of  circulation.  By 
rapidity  of  circulation  is  meant  the  average  number  of  times 
that  the  pieces  of  money  change  hands  within  a  given  period  — 
say  a  year  —  in  efTecting  sales.  If,  therefore,  we  centre  our 
attention  upon  the  chief  function  of  money,  —  that  of  a  medium 
of  exchange,  —  and  if  we  use  the  term  "volume  of  transactions" 
to  signify  the  product  of  the  number  of  commodities  sold,  the 
number  of  times  that  they  are  sold  in  a  given  period,  and  the 
price  at  which  the  sales  take  place,  the  general  law  of  money 


§  iSy]  Value  of  Money  457 

might  be  expressed  in  the  equation:  the  quantity  of  money 
multiplied  by  the  rapidity  of  circulation  is  equal  to  the  volume 
of  transactions  in  cash  that  are  effected  at  a  given  price  level. 

According  to  this  law,  if  the  volume  of  business  and  the  price 
level  remain  the  same,  an  increase  in  the  rapidity  of  circula- 
tion means  that  a  smaller  quantity  of  money  is  needed;  and 
per  contra  an  increase  in  the  supply  of  money  means  a  diminu- 
tion in  the  rapidity  of  circulation.  The  rapidity  of  circula- 
tion is  affected  not  only  by  the  quantity  of  money,  but  by  the 
other  factors  in  the  equation,  —  the  volume  of  business  and 
the  price  level. 

So  far  as  the  independent  action  of  rapidity  of  circulation 
on  prices  is  concerned,  the  influence  is  comparatively  slight. 
For  while  communities  differ  greatly  from  one  another,  the 
rapidity  of  circulation  in  the  same  community  is  normally  the 
result  of  long-continued  business  usages,  which  alter  but  slowly. 
It  is  only  in  sudden  emergencies  like  panics,  when  business 
comes  almost  to  a  standstill,  that  the  rapidity  of  circulation 
abruptly  declines,  with  a  resulting  fall  in  prices.  But  even  here 
it  is  difficult  to  say  how  much  of  the  fall  of  prices  is  due  to  a 
lessening  of  the  rapidity  of  circulation,  how  much  to  a  dimin- 
ished supply  of  money  (which  the  banks  will  now  hoard)  in 
actual  circulation,  and  how  much  to  a  contraction  of  credit 
which  always  accompanies  a  crisis.  • 

Disregarding,  then,  the  rapidity  of  circulation,  it  might  be 
claimed  that  an  increase  in  the  supply  of  money  will  lower  its 
value  or  raise  the  price  level.  In  one  sense  it  is  a  truism  to 
state  that  an  augmented  supply  of  anything  will  lower  its  value. 
If,  however,  by  this  is  meant  that  the  price  of  anything  varies 
in  a  precisely  inverse  ratio  to  the  supply,  the  statement  is  in- 
exact, for  the  obvious  reason  that  every  change  in  supply  nor- 
mally affects  the  demand.  As  Gregory  King  pointed  out  in 
the  seventeenth  century,  wheat  will  rise  in  price  considerably 
faster  than  the  supply  falls.  He  estimated  from  the  crop 
statistics  of  a  series  of  years  that  a  deficiency  in  the  harvest  of 


458  Money,  Nature  and  Value  [§  188 

one,  two,  three,  four  and  five  tenths  would  raise  the  price  three, 
eight,  sixteen,  twenty-eight  and  forty-five  tenths  respectively. 
In  the  same  way,  doubling  the  supply  of  wheat  will  not  halve 
the  price.  In  no  two  commodities  does  a  change  in  the  supply 
exert  the  same  influence  on  the  price,  because  in  no  two  com- 
modities is  the  "demand  curve,"  which  represents  the  elas- 
ticity of  the  demand,  the  same.  A  distinction  may  even  be 
drawn  in  this  respect  between  metallic  and  paper  money.  In 
the  case  of  paper  or  fiat  money,  where  the  value  is  due  almost 
entirely  to  its  use  as  money,  an  increase  in  the  supply  beyond 
a  certain  point  is  more  directly  reflected  in  a  fall  of  value  than 
in  the  case  of  gold  or  silver,  which  possesses  in  addition  a  value 
as  a  commodity,  and  the  demand  for  which  is  non-monetary 
as  well  as  monetary  in  character. 

188.   The  Quantity  Theory  and  the  Cost  Theory 

It  is  obvious,  therefore,  that  the  famous  "quantity  theory" 
of  money  —  the  theory  that  the  value  of  money  depends  on  its 
quantity  —  is  indefensible  in  this  bald  form.  For  the  value 
of  anything  does  not  depend,  as  we  know,  upon  supply  alone 
nor  upon  demand  alone,  but  is  a  result  of  the  equilibrium  be- 
tween supply  and  demand.  So  that  in  the  law  of  money  given 
above,  the  level  of  prices  may  be  affected  not  only  by  changes 
in  the  rapidity  of  circulatioa  as  well  as  in  the  quantity  of  money, 
but  also  by  changes  in  the  volume  of  transactions.  More- 
over, the  law  of  money  there  stated,  although  accurate  so  far 
as  it  goes,  is  not  exhaustive,  for  two  reasons.  In  the  first 
place,  when  we  speak  of  "the  volume  of  transactions  in  cash," 
we  disregard  the  credit  operations  which  also  vitally  affect  the 
demand.  Secondly,  in  using  the  same  phrase,  the  "volume  of 
transactions"  does  not  include  the  functions  of  money  as  a  re- 
serve and  as  a  store  of  value.  These  were  discussed  under  the 
head  of  demand  for  money,  and  properly  so,  because  the  needs 
of  the  community  for  money  to  serve  these  ends  is  distinct  from 
its   need   for   money   in   making   actual   exchanges.     But   they 


§  iS8]  Quantity  and  Cost  Theory  459 

might  also  have  been  discussed  under  the  head  of  supply  of 
money  in  so  far  as  the  amount  of  money  resting  in  the  pockets 
of  the  people  in  between  actual  sales  or  stored  in  the  reserves 
of  banks  and  governments  must  be  added  to  the  quantity  em- 
ployed in  making  actual  exchanges  in  order  to  arrive  at  the 
entire  supply  of  money  in  existence.  From  this  point  of  view, 
therefore,  the  quantity  of  money  which  directly  influences 
prices  is  primarily  the  quantity  employed  in  making  actual 
exchanges,  that  is,  the  entire  amount  of  money  in  existence 
less  the  sums  utilized  as  a  reserve  or  as  a  store  of  value.  The 
more  comprehensive  law  of  money,  then,  may  be  summed  up 
in  the  equation:  the  supply  of  money  (less  the  sums  used  as  a 
reserve  and  a  store  of  value)  multiplied  by  the  rapidity  of  cir- 
culation is  equal  to  the  volume  of  exchanges  in  cash  (as  modi- 
fied by  the  credit  transactions)  effected  at  a  given  price  level. 

While  the  quantity  theory  of  money  is  therefore  untenable 
in  its  crude  form,  it  may  nevertheless  be  employed  to  mean 
that,  in  the  absence  of  relative  changes  in  the  other  factors,  a 
variation  in  the  quantity  of  money  will  produce  a  change  in 
the  price  level.  In  this  sense  the  "quantity  theory"  is  only 
an  elliptical  way  of  stating  the  ordinary  law  of  demand  and 
supply.  There  is  an  additional  defence  for  the  "quantity 
theory"  in  this  sense,  because  when  we  come  to  examine  the 
really  controlling  factors  over  long  periods  of  time,  we  find  that 
the  emphasis  can  well  be  laid  on  the  supply  side,  and  especially 
on  the  quantity  of  money.  Thus  the  revolution  of  prices  in 
the  sixteenth  century  was  due  to  the  discovery  of  the  Ameri- 
can silver  mines;  the  fall  of  prices  from  1873  to  1896  is  ascrib- 
able  to  the  fact  that  the  output  of  gold  did  not  keep  pace  with 
the  increase  of  population  and  business;  and  the  great  rise  of 
prices  from  1896  to  the  year  19 14  is  due  to  the  immensely 
augmented  production  of  gold.  But  on  the  other  hand  the 
gold  discoveries  of  1849-50  in  California  and  Australia,  as  we 
shall  see  in  §  193,  did  not  lead  to  a  proportionate  rise  of  prices 
because,  in  part  at  least,  of  the  somewhat  fortuitous  concur- 


460  Money,  Nature  and  Value  [§  188 

rence  of  a  vastly  increased  demand  for  money.  And  for  shorter 
periods,  the  influence  of  the  mere  quantity  of  money  on  prices 
is  frequently  outweighed  by  changes  not  only  in  the  rapidity 
of  circulation,  but  more  especially  in  the  various  factors  that 
make  up  the  demand  for  money. 

Sometimes  it  is  stated  that  the  value  of  money  depends 
upon  its  cost  of  production.  This  does  not,  however,  involve 
any  new  principle.  The  only  difference  between  money  and 
other  commodities  is  that  the  influence  of  cost  of  production 
upon  the  supply,  and  hence  upon  the  value,  of  money  works 
itself  out  more  slowly. 

The  value  of  money,  it  must  be  remembered,  is  not  due 
to  the  value  of  gold  any  more  than  the  value  of  iron  beams 
to  that  of  iron  ore.  On  the  contrary,  just  as  the  value  of  iron 
ore  is  due  to  that  of  iron  beams  (and  other  iron  products),  so 
the  value  of  gold  bullion  is  due  to  the  value  of  gold  money 
(as  well  as  of  gold  used  in  the  arts).  Just  as  the  value  of  any 
reproducible  commodity  tends  to  adjust  itself  to  the  point  of 
marginal  cost,  so  the  value  of  money  tends  to  adjust  itself  to 
the  marginal  cost  of  the  money  commodity.  A  decrease  in  the 
expense  of  mining,  such  as  that  which  has  been  effected  by  the 
modern  cyanide  process,  renders  possible  a  far  greater  output. 
Since  the  precious  metals,  however,  are  exceedingly  durable, 
this  annual  increment  forms  only  a  small  fraction  of  the  entire 
available  supply,  and  will  not  produce  any  immediate  change 
in  value.  In  1912,  for  instance,  the  annual  production  of  gold 
was  466  and  that  of  silver  138  millions  of  dollars,  while  the 
world's  stock  exclusive  of  China  was  estimated  at  8,481  and 
3,132  millions  respectively.  While  fluctuations  in  particular 
prices  are  often  sharp  and  sudden,  because  of  the  insignificance 
of  the  stock  on  hand  as  compared  to  the  quantities  that  can  be 
produced  at  an  altered  cost,  the  variations  in  the  general  price 
level  due  to  changes  in  the  cost  of  money  are  far  more  gradual. 
Sooner  or  later,  however,  an  alteration  in  the  rate  of  annual 
increase  will  make  itself  felt.     A  lower  cost  of  production  of 


§  189]  The  Price  Level  461 

money  may  hence  be  said  to  raise  general  prices,  in  so  far  as  it 
augments  the  quantity  of  the  money  commodity.  The  cost-of- 
production  theory  thus  resolves  itself  into  the  quantity  theory. 

189.   The  Price  Level 

The  level  of  prices  may  be  affected  by  impulses  starting 
from  the  side  of  commodities  as  well  as  from  that  of  money. 
The  price  level  in  China  dififers  from  that  in  America.  In 
Athens,  in  the  time  of  Pericles,  money  was  worth  at  least  three 
times  as  much  as  to-day;  in  America  a  century  ago  the  pur- 
chasing power  of  money  was  far  greater  than  at  present.  The 
explanation  is  to  be  sought  in  the  general  conditions  of  demand 
and  the  circumstances  of  cost.  Modern  industrial  methods 
lead  to  vast  and  varied  consumption,  to  more  efficient  produc- 
tion and  to  higher  wages.  The  greater  command  of  wealth 
and  the  lower  real  cost  to  society  are,  however,  accompanied 
by  the  higher  money  prices  that  go  with  the  augmented  wages. 
In  other  words,  the  general  price  level  tends  to  rise;  that  is, 
more  money  is  needed  to  effect  the  exchanges.  This  can,  how- 
ever, come  about  only  if  there  is  an  increased  supply  of  money 
which  adjusts  itself  to  the  newer  price  at  a  lower  cost  level. 
Thus,  while  diversified  demand,  augmented  consumption  and 
mass  production  set  in  motion  an  increase  of  prices,  they  must 
be  accompanied  by  a  reduction  in  the  relative  cost  of  producing 
or  acquiring  the  money  commodity,  if  the  rise  is  to  be  perma- 
nent. This  is  what  happened  in  Germany  a  generation  ago, 
and  what  is  happening  on  a  far  greater  scale  in  Japan  at  present. 

Because  of  the  fact  that  values  of  commodities  as  well  as  of 
money  itself  are  constantly  changing,  it  is  not  always  easy  to 
measure  with  precision  the  variations  in  the  purchasing  power 
of  money.  The  best  expedient  is  that  suggested  by  Evelyn 
in  1798,  by  Lowe  in  1822,  by  Scrope  in  1833,  and  by  Porter  in 
1836,  but  elaborated  by  Jevons  in  1863,  and  known  as  the  in- 
dex number.  Here  the  price  of  an  article  at  a  given  time,  or 
its  average  price  during  a  given  period,  is  taken  as  a  basisi  and 


462  Money,  Nature  and  Value  [§  189 

called  100.  If  at  the  next  selected  date  the  price  has  risen 
one-tenth,  it  would  be  assigned  the  figure  no.  By  choosing 
a  number  of  different  articles  and  taking  the  average  of  the 
figures  as  they  vary  from  the  base  line  of  loo,  we  reach  the  index 
number. 

The  percentage  of  change  in  the  value  of  money  is  obviously 
not  the  same  as  the  percentage  of  change  in  the  general  price 
level.  If  general  prices  double,  that  is,  if  the  index  number  in- 
creases from  100  to  200,  each  unit  of  money  will  buy  only  half 
as  much  as  before,  or,  in  other  words,  the  value  of  money  will 
fall  one-half.  A  rise  of  prices  of  15  per  cent,  or  a  change  in 
the  index  number  from  100  to  115,  during  one  year  means 
that  the  purchasing  power  of  100  cents  at  the  end  of  the  year 
is  ii5  or  86.95  per  cent  of  its  purchasing  power  at  the  begin- 
ning. This  is  equivalent  to  a  loss  of  13.05  per  cent.  A  rise 
of  15  per  cent  in  the  general  price  level  thus  equals  a  fall  of 
13.05  per  cent  in  the  value  of  money.  The  change  in  the  in- 
dex number  shows  the  alteration  in  the  price  level;  the  change 
in  the  reciprocal  of  the  index  number  shows  the  change  in  the 
value  of  money. 

The  utihty  of  the  index  number  depends  partly  on  the  number 
and  choice  of  commodities,  partly  on  the  decision  to  use  retail  or 
wholesale  prices,  partly  on  the  kind  of  average  employed. 

(i)  It  is  obvious  that  the  larger  the  range  of  commodities 
selected,  the  less  w'ill  be  the  chances  of  error  arising  from 
sudden  fluctuations  in  the  price  of  any  single  one.  Even  if 
we  take  a  large  number  of  ordinary  articles,  however,  there 
still  remain  two  important  classes  as  to  which  it  is  exceedingly 
difficult  to  quote  accurate  price  lists.  One  is  the  price  of  real 
estate,  or  house  and  land  rent;  the  other  is  the  price  of  labor,  or 
general  wages.  The  almost  universal  exclusion  of  these  catego- 
ries undoubtedly  impairs  the  accuracy  of  the  index  number. 

(2)  While  there  is  a  general  correspondence  between  whole- 
sale and  retail  prices,  there  is  no  precise  relation.  It  is  well 
established  that  retail  prices  fluctuate  less  than  wholesale  prices, 


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§  iSg]  The  Price  Level  463 

because  they  are  more  dependent  on  custom  and  not  so  read- 
ily altered.  This  is  apparent  from  the  charts  opposite  pages 
462  and  463.  Since  it  is  impracticable  to  compute  the  pro- 
portion of  retail  to  wholesale  transactions  in  various  commodi- 
ties, the  index  number  must  be  confined  either  to  the  one  or 
to  the  other,  with  a  necessarily  resultant  lack  of  precision  as  to 
the  actual  purchasing  power  of  money  in  all  transactions. 

(3)  The  ordinary  average  is  the  arithmetic  average,  where 
the  figures  representing  the  variation  from  the  base  line  of 
100  are  added  together,  and  the  aggregate  is  divided  by  the 
number  of  commodities  used.  This  average  tends,  as  can  be 
easily  calculated,  to  exaggerate  the  influence  of  rising  prices. 
As  a  consequence,  statisticians  often  utilize  the  so-called  geo- 
metric average  which  is  found  by  multiplying  a  number  of 
quantities  and  extracting  a  root  equivalent  to  that  number. 
Sometimes  to  secure  still  greater  precision,  use  is  made  of  the 
harmonic  average,  or  the  reciprocal  of  the  arithmetic  average  of 
the  reciprocals  of  the  quantities.  Finally  there  is  still  another 
choice,  known  as  that  between  the  simple  and  the  weighted 
average.  Weighting  means  assigning  to  each  article  an  im- 
portance proportionate  to  the  amount  sold  or  to  some  other 
criterion  which  distinguishes  one  commodity  from  another. 

In  practice,  however,  it  has  been  found  that  there  is  not 
enough  difference  between  these  various  methods  seriously  to 
impair  the  value  of  the  result,  which  can  at  best  only  be  ap- 
proximate. The  most  familiar  index-numbers  are  those  of 
Messrs.  Jevons,  Palgrave,  Soetbeer,  Sauerbeck,  Dun-Gibson, 
Bradstreets,  the  London  Economist,  the  Board  of  Trade  and 
the  United  States  Bureau  of  Labor. ^  Without  their  use  it  is 
virtually  impossible  to  make  more  than  a  mere  guess  at  the 
rise  or  fall  in  the  general  price  level.  It  will  be  of  interest 
nevertheless  to  append  opposite  page  466  a  chart  showing  the 

1  For  an  explanation  of  the  earlier  index  numbers  see  the  Biillclin  of 
the  Department  (now  Bureau)  of  Labor,  no.  39,  1902.  tor  the  later  ones 
see  the  same  Bullclin,  no.  181  (1915)  and  no.  226  (1917). 


464  Money,  Nature  and  Value  [§190 

changes  in  the  general  price  level  for  the  last  quarter  of  the 
century  in  the  United  States  as  compared  with  Great  Britain 
and  Germany.^  In  the  chart  following  page  464  will  be  found 
the  changes  in  the  price  level  in  England  from  17  go  to  1913, 
showing  the  great  extremes  of  a  century.  In  the  table  opposite 
page  467  we  give  the  index  numbers  of  wholesale  and  retail  prices 
of  food  for  the  United  States  from  1890  to  191 2,  showing  the 
great  depression  culminating  in  1897,  and  the  remarkable  rise 
thereafter.^  Finally,  in  order  to  bring  the  facts  down  to  date 
we  add  in  the  table  opposite  page  468  the  index  numbers  of 
wholesale  prices  from  1914  to  1919  in  the  United  States,  Great 
Britain  and  France,  showing  the  striking  influence  of  the  Great 
War.'' 

190.     The  Distribution  and  Stability  of  Money 

Variations  in  the  price  level  are  not  uniform  or  instantaneous 
over  the  whole  economic  field,  but  propagate  themselves  in 
waves  from  commodity  to  commodity  and  from  country  to 
country.  When,  for  instance,  a  miner  brings  in  his  gold  dust 
or  nuggets,  he  deposits  them  in  the  nearest  sub-treasury,  taking 
in  return  cash  and  bank  drafts.  A  part  of  this  he  may  spend 
on  articles  which  for  that  very  reason  tend  to  rise  in  price. 
But  most  of  his  annual  output  will  be  deposited  in  the  banks, 
whose  reserves  are  thereby  increased  to  such  an  extent  that 
they  will  send  the  funds  to  New  York  to  be  loaned  on  call  on 

/ 

'  Based  on  an  article  by  R.  H.  Hooker  in  the  Journal  of  the  Royal 
Statistical  Society,  vol.  75,  pp.  1-50. 

2  Bulletin  of  Bureau  of  Labor.  The  base  of  100  in  each  case  is  the  aver- 
age price  for  the  years  from  1890-1899  inclusive.  The  index  number  of 
wholesale  prices  is  based  upon  258  representative  staple  commodities. 
The  wholesale  prices  of  food  are  based  on  54  articles,  the  retail  prices 
on  30  articles  of  food.  In  the  case  of  retail  prices  the  weighted  average 
is  used. 

^  In  this  table  the  index  numbers  are  e.xpressed  as  percentages  of  the 
index  numbers  for  1913. 


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§  iQo]  Distribution  of  Money  465 

the  exchanges  for  transactions  in  securities  as  well  as  in  cotton 
and  wheat.  The  lower  rates  for  "money"  will  tend  to  increase 
the  dealings  in,  and  the  prices  of,  the  great  speculative  staples, 
while  the  higher  prices  of  railroad  securities  and  industrials 
will  tend  to  augment  the  demand  for  railroad  supplies  and  the 
raw  materials  of  industry.  Gradually  the  banks  will  increase 
their  loans  to  the  ordinary  merchant,  thus  stimulating  the 
demand  for  commodities  and  ultimately  for  labor.  It  is  largely 
for  the  reason  that  they  are  more  amenable  to  speculative 
influences  that,  in  a  period  of  rising  prices,  as  Cairnes  pointed 
out,  crude  products  rise  more  than  manufactures  and  animal 
more  than  vegetable  products,  while  wages  are  almost  always 
the  last  to  advance.  A  broader  generalization,  however,  would 
be  that  the  rise  in  prices  is  noticeable  first  in  stocks  and  bonds, 
then  in  speculative  staples,  next  in  ordinary  commodities, 
then  in  retail  prices,  and  finally  in  labor  and  land.  The  same 
progression  could  easily  be  shown  in  the  case  of  falling  prices. 
In  the  meantime,  however,  the  perturbation  of  prices  is 
transmitted  from  country  to  country.  The  distribution  of 
metallic  money  is  in  large  measure  the  result  of  international 
forces.  Some  commodities  have  an  international,  others  only 
a  local,  market;  the  price  level  in  each  country  is  a  result  of 
both  considerations.  Every,  nation  will,  under  normal  condi- 
tions, secure  enough  money  to  preserve  this  relative  price 
level.  If  there  is  an  abnormal  increase  in  the  quantity  of  gold 
in  one  country,  it  will  tend  to  produce  higher  prices,  augment- 
ing imports  of  commodities  and  exports  of  gold  until  the 
equiUbrium  is  restored  at  a  somewhat  higher  level.  The  pro- 
cess may  indeed  be  retarded  by  various  influences.  If  the 
increased  supply  of  gold  comes  from  the  mines,  it  may  be  ex- 
ported at  once,  or  it  may  go  to  the  bank  reserves  and  flow*  out 
under  general  banking  operations  without  at  once  sensibly 
affecting  the  general  price  level.  Or  the  international  trans- 
actioixs  may  take  place  in  securities  rather  than  in  commodi- 
ties.    Or,  finally,  through  the  intervention  of  credit  transactions, 


466  Money,  Nature  and  Value  [§  190 

there  may  be  a  temporary  change  in  prices  unaccompanied  by 
any  movement  of  gold.  As  the  prices  of  securities,  however, 
are  ultimately  dependent  on  the  price  level  of  commodities, 
and  inasmuch  as  all  credit  rests  at  bottom  on  the  basis  of 
coin,  there  can  be  no  long-continued  disarrangement  of  the 
equilibrium  without  setting  in  motion  the  forces  working  for 
its  reestablishment. 

The  equilibrium  is  one  between  relative  price  levels,  which 
is  only  another  way  of  stating  the  relative  amounts  of  metallic 
money  in  each  country.  Any  sudden  alteration  in  the  use  of 
credit  devices  will  exert  its  temporary  effect;  but  in  the  long 
run  there  is  a  correlation  between  the  price  level  and  the 
money  supply.  Under  healthy  fiscal  conditions,  that  is,  when 
the  currency  is  on  a  metallic  basis,  the  amount  of  money  in 
any  country  will  be  self-regulative  and  adequate  to  maintain 
the  relative  price  level. 

Since  the  purchasing  power  of  money  is  reflected  in  the  level 
of  prices,  an  appreciating  standard  is  equivalent  to  lower  prices 
and  a  depreciating  standard  to  higher  prices.  The  instability 
of  the  value  of  money  leads  to  important  results. 

If  the  standard  appreciates,  that  is  if  prices  fall,  because  the 
supply  of  money  does  not  keep  up  to  the  demand  at  the  old 
level,  the  first  consequence  in  countries  like  the  United  States, 
at  all  events,  is  apt  to  be  noticed  in  the  stock  market.  As  the 
bank  reserves  decrease,  because  of  the  relatively  declining  sup- 
ply of  money,  the  banks  call  in  their  loans,  and  interest  rates  on 
call  loans  are  apt  to  increase  for  a  time.  Speculators  first  in 
securities  and  then  in  staple  commodities  tend  to  sell  their 
holdings  at  a  sacrifice,  and  there  develops  what  is  called  a 
"bear"  market.  As  the  fall  in  prices  reaches  general  indus- 
try, profits  are  curtailed  in  some  businesses  and  enterprise 
slackens.  Raw  materials  are  indeed  cheaper,  but  the  manu- 
facturers cannot  market  their  goods  at  satisfactory  figures  and 
lose  money.  With  the  falling  off  in  the  demand  for  new  capi- 
tal, interest  rates  in  general  will  finally  fall. 


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§  igo]  Distribution  of  Money  467 

Thus  the  farmer,  the  merchant,  the  manufacturer  and  the 
banker  all  in  turn  suffer  from  the  falling  prices  and  the  "bad 
times"  are  ushered  in.  No  one  realizes  that  the  trouble  is 
due  to  any  general  change  in  monetary  conditions,  but  all 
ascribe  the  depression  to  over-production  or  other  special 
causes.  It  might  seem  that  the  laborers  are  relatively  better 
off,  because  their  wages  are  the  last  to  fall.  But  in  reality  the 
lack  of  prosperity  affects  them  equally,  because  the  employers 
either  lay  off  part  of  the  laborers  or  work  on  half  time.  The 
professional  classes  suffer  because  of  the  decline  of  business. 
Borrowers  are  embarrassed  because  they  must  work  harder  to 
pay  back  an  equivalent  sum  of  money.  Owners  of  land  and 
of  corporate  shares  will  get  less  rent  and  less  dividends.  There 
are  only  two  classes  who  do  not  suffer,  —  those  in  receipt  of  a 
fixed  income,  like  teachers  and  government  officials;  and  bond- 
holders (as  distinct  from  stockholders),  who,  receiving  a  fixed 
sum  while  the  general  rate  of  interest  is  falling,  will  see  the 
capital  value  of  their  bonds  appreciate.  In  the  main,  however, 
the  "bad  times"  are  general. 

A  depreciating  standard,  or  a  rise  in  prices,  such  as  that 
which  the  world  has  witnessed  from  1896  to  1914,  produces 
the  opposite  effect.  Some  classes  are  benefited,  some  are 
injured.  If  the  gold  is  produced  in  the  country,  as  in  the 
United  States,  the  increasing  supply  will  swell  the  bank  reserves 
and  for  the  time  reduce  the  rate  of  interest  on  call  money, 
benefiting  borrowers,  and  tending  to  produce  a  "bull  market" 
by  putting  up  the  price  of  stocks.  If  the  increased  supply  of 
gold  comes  into  a  country  in  return  for  extra  exports  to  the 
gold-producing  countries,  the  effect  on  interest  will  be  slighter 
at  first,  and  that  on  prices  more  immediate.  In  either  case, 
however,  stocks  and  speculative  commodities  rise  in  price. 
Debtors  benefit,  because  they  have  to  work  less  to  repay  their 
obligations.  On  the  other  hand,  the  salaried  and  wages 
classes  find  it  difficult  to  subsist  on  their  accustomed  stipends, 
and  there  is  a  concerted  movement  looking  to  the  demand  for 


468  Money,  Nature  and  Value  [§  190 

increased  wages,  which  with  real  estate  are  the  last  to  rise. 
But  profits  increase  with  the  rising  prices,  and  the  resulting 
activity  in  business  will  not  only  increase  the  demand  for  raw 
materials  and  thus  the  gains  of  the  farmer,  but  will  also  aug- 
ment the  demand  for  new  capital,  and  thus  tend  ultimately  to 
raise  the  rate  of  interest  and  to  increase  the  prosperity  of  the 
financial  sections  of  the  community.  But  with  a  rise  in 
interest,  the  price  of  bonds  will  fall.  In  the  main,  however, 
the  community  feels  itself  prosperous,  and  the  danger  now  is 
that  production  may  be  artificially  stimulated  and  that  the 
result  may  be  a  speculative  mania  culminating  in  a  crisis. 

Thus  both  rising  and  falling  prices  create  an  unstable  equilib- 
rium which  means  disturbance  in  industry  and  unequal  gains 
or  losses  to  different  classes.  It  is  not  high  or  low  prices  as 
such  which  do  the  harm,  but  rising  or  falling  prices. 

WhUe  many  factors  influence  the  value  of  money  or  the  level 
of  prices  the  one  of  chief  importance  in  time  of  peace  is  the  out- 
put of  the  precious  metals  used  as  money.  The  figures  wiU  be 
found  opposite  page  476.  Between  1570  and  1640,  with  the 
enormous  new  supplies  of  silver  from  America,  prices  rose  from 
200  to  300  per  cent,  constituting  the  famous  "Revolution  of 
Prices."  In  the  nineteenth  century  we  have  had  several  cycles 
of  severe  fluctuations.  Between  1790  and  1810  prices  rose  about 
80  per  cent  as  a  result  of  the  wars;  between  18 10  and  1850  they 
feU  about  60  per  cent,  the  supply  of  sflver  being  cut  oR  by  the 
political  disturbances  in  South  America,  and  that  of  gold  not 
increasing  sufficiently  to  keep  pace  with  the  expanding  industry. 
From  1850  to  i860  came  a  rise  of  prices  of  about  20  per  cent, 
due  to  the  gold  discoveries.  That  the  rise  was  not  still  greater 
is  due  partly  to  the  drain  of  silver  to  India,  but  chiefly  to  the  en- 
larged demand  for  money  which  accompanied  the  increase  of 
business  transactions,  resulting  from  the  revolution  in  the  media 
of  transportation.  From  i860  to  1873  the  price  level  remained 
relatively  stable,  rising  considerably,  however,  from  1870  to 
1873,  owing  to  the  speculation  which  culminated  in  the  crisis 


WHOLESALE  PRICES   1913-1921 
(BASES  ARE  THE  INDEX  NUMBERS  FOR  1913^ 


1913 

JAN. 

1914 

JAN. 

1915 

JAN. 

1916 

JAN. 

1917 

JAN. 

1918 

JAN. 

1919 

JAN. 

1920       1921 

JAN.MAYiJAN.MAY 

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580 

570 

550 

520. 

A 

470 

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§  190]  Distribution  of  Money  469 

of  1873.  From  1873  to  1896  prices  fell  almost  60  per  cent,  as 
a  result  of  the  relative  diminution  in  the  output  of  gold.  Since 
1896  the  prodigious  increase  in  the  production  of  gold  has  caused 
another  era  of  rising  prices  which  by  1914  amounted  to  almost 
60  per  cent.  Then  came  the  Great  War  with  a  further  increase 
of  over  100  per  cent  by  1919. 

These  fluctuations  in  the  price  level  have  only  recently  been 
recognized  as  an  evil.  No  practical  method  has  yet  been  dis- 
covered to  reduce  them  to  a  minimum.  Perhaps  the  best- 
known  proposition  is  that  of  the  so-called  multiple  or  tabular 
standard.^  The  unit  of  measure  would  here  be  the  aggregate 
price  of  a  number  of  commodities,  whose  values  might  be  reached 
by  a  method  of  index  number.  Even,  however,  if  such  a  sys- 
tem were  practicable,  —  a  fact  open  to  the  most  serious  ques- 
tion, —  it  may  be  impugned  on  the  ground  that  for  short-time 
debts  it  is  not  needed,  and  for  long-time  debts  there  is  no  assur- 
ance that  the  two  parties  will  be  put  in  a  more  equal  position 
than  if  ordinary  money  is  used.  With  all  its  shortcomings, 
therefore,  the  gold  standard  seems  to  be  the  one  which  involves 
the  least  injustice  to  both.  Until,  therefore,  a  more  practicable 
scheme  is  devised,  it  is  altogether  probable  that  the  business 
world  will  have  to  content  itself  with  a  money  unit  which,  like 
the  gold  standard,  is  exposed  to  the  inevitable  fluctuations  in 
value  that  are  incident  to  all  articles  of  human  desire  and  that 
are  so  largely  influenced  by  the  bounty  of  nature. 

1  Many  other  standards  have  been  proposed.  Walsh,  who  has  de- 
voted an  entire  volume  to  this  topic,  sums  them  up  in  The  Fundamental 
Problem  in  Monetary  Science,  part  4,  as  the  commodity,  wages  and 
cost  standards.  Edgeworth,  in  pp.  162-164  of  his  Report  of  1889, 
discusses  them  as  the  capital,  consumption,  currency,  income,  in- 
definite production  and  wages  standards.  Kinley,  Money,  ch.  xiii, 
mentions  the  labor  time,  labor  cost,  disutility  of  labor,  marginal  utility, 
total  utility  and  purchaser's  surplus  standards.  Professor  Irving  Fisher 
in  Tlic  Purchasing  Poivcr  of  Money  (191 1)  has  championed  a  somewhat 
analogous,  but  not  very  practicable,  international  scheme. 


CHAPTER  XXIX 

MONEY,   PRACTICAL  PROBLEMS 

191.   References 

J.  F.  Johnson,  Money  and  Currency  (n.  d.,  1905),  chs.  ix-xvii;  F.  A. 
Walker,  Money  (1878),  parts  i  and  ii;  J.  S.  Nicholson,  Principles  (1901), 
bk.  iii,  chs.  xi-xiv;  H.  White,  Money  and  Banking  (4th  ed.,  191 1), 
parts  i  and  ii;  W  A.  Shaw,  The  History  of  the  Currency  (1896);  H.  G. 
Moulton,  The  Financial  Organization  of  Society  (1921);  A.  B.  Hep- 
burn, A  History  of  Currency  in  the  U.  S.  (1915);  H.  P.  Willis,  History 
of  the  Latin  Monetary  Union  (1901) ;  H.  B.  Russell,  International  Monetary 
Conferences  (1898);  A.  D.  Noyes,  Forty  Years  of  American  Finance  (1909) 
and  Financial  Chapters  of  the  War  (1916);  S.  P.  Breckenridge,  Lei:,al 
Tender  (1903);  W.  C.  Mitchell,  A  History  of  the  Greenbacks  (1903);  Count 
Masayosbd,  Report  on  the  Adoption  of  the  Gold  Standard  in  Japan  (1895); 
United  States  Commission  on  International  Exchange,  Reports  on  the 
Introduction  of  the  Gold  Exchange  Standard  into  China,  etc.  (1903  and 
1904);  E.  W.  Kemmerer,  Modern  Currency  Reforms  (1916);  J.  M. 
Keynes,  Itdian  Currency  and  Finance  (1913). 

192.   Coinage  Problems.     Seigniorage  and  Debasement 

The  term  free  coinage  is  employed  in  two  senses.  If  the 
government  makes  no  charge  for  converting  bullion  into  coin, 
the  coinage  may  be  said  to  be  free.  On  the  other  hand, 
free  coinage  may  mean  the  right  of  any  owner  of  bullion  to 
have  it  converted  into  coin.  When  we  commonly  speak  of 
the  free  coinage  of  silver  we  employ  the  term  in  this  second 
sense.  The  real  distinction  that  ought  to  be  observed  is  be- 
tween free  and  gratuitous  coinage,  the  former  implying  the 
right  to  have  bullion  converted  into  coin,  the  latter  being 
coinage  without  any  charge.  There  may  be  free  coinage,  with 
or  without  gratuitous  coinage. 

Another  term  susceptible  of  several  meanings  is  seigniorage. 

470 


§  192]         Seigniorage  and  Debasement  471 

Ordinarily  it  signifies  the  charge  made  by  government  in  re- 
ceiving bullion  at  its  market  value,  and  deducting  a  certain 
amount  before  or  after  coinage.  It  involves  to  this  extent  a 
difference  between  the  bullion  and  the  mint  value  of  the  coin, 
and  it  was  this  difference  which  accrued  to  the  mediaeval 
seigneur  or  local  potentate  who  had  the  monopoly  of  coinage. 
But  where,  as  in  the  United  States,  owing  to  a  fall  in  the  mar- 
ket price  of  the  bullion,  the  government  purchased  a  quantity 
of  silver  for  fifty  or  sixty  cents  and  converted  it  into  a  silver 
dollar,  the  difference,  which  was  officially  called  "gains"  and 
put  into  the  "silver-profit  fund"  (or  in  the  case  of  the  sub- 
sidiary silver  into  the  "minor-coinage-profit  fund"),  was  also 
popularly  called  seigniorage. 

Sometimes  a  further  distinction  is  made  between  seigniorage 
(in  the  first  sense)  and  brassage  or  mint-charge  proper.  Bras- 
sage is  the  sum  levied  to  cover  the  actual  cost  of  preparing  the 
bullion  to  be  coined,  while  seigniorage  would  then  be  a  sur- 
plus charge  representing  a  net  gain  to  the  government.  This 
distinction  is,  however,  not  always  observed.  In  England  the 
mediaeval  charges  were  divided  between  the  king  and  the  mint, 
seigniorage  proper  being  abolished  in  1666.  In  the  United 
States  the  law  of'  1792  provided  for  gratuitous  coinage,  but 
imposed  a  charge  of  ^  of  i  per  cent  if  the  coins  were  de- 
manded at  once.  The  act  of  1853  levied  a  general  seignior- 
age of  ^  of  I  per  cent,  but  when  free  coinage  of  silver  was 
abolished  in  1873  the  seigniorage  on  gold  was  reduced  to  i  of 
I  per  cent,  and  finally  disappeared  in  1875.  The  government, 
however,  still  makes  a  charge,  as  fixed  by  the  Director  of  the 
Mint,  to  cover  the  actual  cost  of  preparing  the  bullion  for 
coinage.  In  France  seigniorage  is  effected  by  withholdins: 
some  of  the  coins,  instead  of  the  bullion,  —  in  the  case  of  gold, 
seven  francs  out  of  the  3100  into  which  a  kilogram  of  gold  is 
coined. 

Seigniorage  is  thus  used  in  three  senses:  (o)  mint-charge 
proper  or  brassage,  to  cover  the  cost  of  coinage,  and  techni- 


472  Money,  Practical  Problems  [§  192 

cally  a  fee;  (6)  an  additional  charge  in  the  nature  of  a  tax; 
and  (c)  the  gain  or  profit  arising  from  converting  buUion  of  a 
low  market  value  into  coins  with  a  high  face  value.  Seignior- 
age exists  in  the  United  States  only  in  the  first  and  third 
senses.  In  whatever  sense  the  term  is  used,  however,  the  im- 
position of  a  seigniorage  always  involves  a  discrepancy  be- 
tween the  value  of  the  coin  and  that  of  the  bullion  in  the  coin. 

A  discrepancy  between  the  original  value  of  the  bullion  and 
that  of  the  coin  may  occur  for  three  further  reasons:  abra- 
sion, mint  accidents  and  debasement. 

(i)  Abrasion  denotes  the  loss  of  weight  by  use.  There  is 
generally  a  limit  of  tolerance  below  which  coins  forfeit  their 
legal-tender  quality.  In  the  United  States  the  tolerance  is  ^ 
of  I  per  cent  of  the  weight  of  the  gold  coins  within  twenty 
years  from  the  date  of  coinage,  or  a  proportionate  loss  for  a 
smaller  period. 

(2)  Accidents  in  minting  involve  the  so-called  remedy  or 
deviation.  Since  the  mechanical  operations  of  the  mint  are 
not  mathematically  exact,  there  will  always  be  a  slight  varia- 
tion in  the  contents  of  the  new  coins.  Remedy  is  the  amount 
of  variation  permitted  by  law  from  the  exact  standard  of  either 
weight  or  fineness  of  the  new  coins.  In  England  the  annual 
test  is  called  the  "trial  of  the  pyx."  In  the  United  States, 
where  the  "pyx"  or  box  is  also  used,  the  "trial  of  the  coins" 
is  conducted  by  the  Assay  Commission. 

(3)  Debasement  can  take  place  in  three  ways:  (a)  by 
diminishing  the  weight  of  the  metal  from  which  the  coin  is 
made;  (b)  by  raising  the  nominal  value  of  a  coin  and  making 
it  legal  tender  at  a  higher  rate  than  before;  and  (c)  by  lower- 
ing the  standard  or  fineness  of  the  metal. 

(a)  When  the  weight  of  the  metal  is  diminished  by  private 
individuals,  it  is  called  clipping  or  sweating.  But  it  was 
formerly  also  practiced  by  governments.  The  English  pound 
was  originally  a  pound  of  standard  silver,  coined  into  240  pence. 
Since  1816,  a  pound  of  silver  has  been  coined  into  792  pence,  or 


§  192]        Seigniorage  and  Debasement  473 

66  shillings.  In  the  same  way  the  silver  livre  at  the  time  of 
the  French  Revolution  weighed  only  yV  as  much  as  the  liber  or 
pound  of  Charlemagne.  In  some  cases,  in  lieu  of  diminishing 
the  weight  of  the  metal,  governments  have  seen  fit  to  alter  the 
material.  So  the  florin,  now  a  silver  coin,  was  originally  a  gold 
coin;  and  the  Spanish  maravedi,  which  was  at  first  made  of 
gold,  is  now  made  of  copper. 

ib)  Debasement  by  raising  the  nominal  value  of  the  coin 
was  common  in  mediasval  Europe,  especially  with  the  gold 
pieces,  a  new  coin  with  a  different  name,  but  with  the  nominal 
value  of  the  old  coin,  generally  being  issued  by  its  side. 
This  explains  the  great  variety  of  English  gold  coins  like 
nobles,  angels,  rials,  unites,  laurels,  crowns,  and  guineas.  The 
guinea,  so-called  because  coined  from  gold  brought  from 
Guinea  by  the  African  company,  was  first  struck  in  1663  with  a 
value  fixed  in  1717  at  21s.,  at  which  figure  it  still  serves  to-day 
as  a  money-of-account.  The  actual  gold  coin  is  the  sovereign, 
of  20s.,  first  coined  in  1485,  which  became  the  standard  in 
1816.  It  is  popularly  called  the  pound  sterling,  both  words 
being  survivals.  For  the  weight  to-day  is  far  less  than  a  pound, 
and  the  sterling  fineness  is  no  longer  that  employed  by  the 
"Easterlings"  or  Scandinavian  traders. 

(c)  Debasement  by  lowering  the  standard  of  the  metal  was 
also  frequent  in  mediaeval  England  and  especially  in  France, 
where  the  classic  example  is  Philippe  le  Bel  who  figures  in 
Dante's  poem  as  the  typical  false  moneyer.  The  purposes  of 
debasement  have  been,  first,  the  discreditable  one  of  securing 
for  the  king  a  revenue  arising  out  of  the  discrepancy  between 
nominal  and  actual  values;  and  secondly,  the  entirely  credit- 
able, but  often  mistaken,  belief  that  a  change  in  the  weight  or 
the  fineness  of  the  coin  would  effectually  prevent  its  exporta- 
tion. In  the  United  States,  as  in  most  modern  countries, 
the  few  examples  of  debasement  are  of  this  second  character. 
This  brings  up  what  is  known  as  Gresham's  law. 

When  different  grades  of  an  article  can  be  secured  for  the 


474  Money,  Practical  Problems  [§  192 

same  price,  individuals  use  the  better  one;  when  different 
grades  of  money  arc  in  existence,  they  use  the  poorer  one. 
In  the  first  case  the  individuals  act  as  buyers,  in  the  second 
as  sellers.  The  use  of  money  is  not  its  consumption,  but  its 
alienation  in  order  to  secure  things  that  can  be  consumed. 
Hence,  so  long  as  the  poor  money  has  legal  tender  equally  with 
the  good,  individuals  can  make  profits  by  melting  or  exporting 
the  latter  and  paying  out  the  former.  This  principle  is  known 
as  Gresham's  law. 

The  name  Gresham's  law  is  due  to  the  fact  that  a  Scotch 
writer,  McLeod,  who  was  not  familiar  with  the  history  of  eco- 
nomic thought,  happened  half  a  century  ago  to  find  the  idea  in 
a  report  to  Elizabeth  by  Sir  Thomas  Gresham.  In  reality,  it 
is  expressed  more  fully  and  forcibly  by  many  of  the  earlier 
mediaeval  writers,  not  to  speak  of  those  of  classic  antiquity. 

It  applies  primarily  to  underweight  or  debased  coin  which 
will  drive  out  the  full-weight  or  good  coin  of  the  same  metal. 
This  will  happen,  however,  only  under  two  conditions.  First, 
the  total  amount  of  money,  good  and  bad,  must  be  in  excess 
of  the  country's  needs.  In  the  second  place,  both  the  good 
and  the  poor  coins  must  be  actually  used  as  money.  A  better 
statement  of  Gresham's  law  would  therefore  be  that  whenever 
a  coin  is  worth  appreciably  more  as  bullion  than  as  money  it 
will  disappear  from  circulation. 

Gresham's  law  applies  also  to  paper  money  as  contrasted 
with  metallic  money.  Here,  however,  as  before,  not  only  must 
the  paper  be  issued  to  excess  before  it  drives  out  the  coin, 
but  public  opinion  may  entirely  prevent  the  circulation  of  the 
paper  money,  as  was  the  case  with  the  greenbacks  on  the  Pacific 
slope  during  the  civil  war. 

Gresham's  law  finally  applies  practically  also  to  coin  of  one 
metal  whose  bullion  value  is  less  than  that  of  coin  of  another 
metal,  provided  that  both  metals  are  legal  standard  money, 
with  free  coinage.  In  every  case,  whenever  there  is  a  double 
standard  with  free  coinage  of  both  metals,  a  discrepancy  be- 


§  193]       Choice  of  the  Money  Standard        475 

I  ween  the  mint  and  the  market  ratio  makes  one  of  the  two 
metals  the  poorer  money,  and  leads  to  a  gradual  disappearance 
of  the  better  money. 

193.   The  Choice  of  the  Money  Standard 

The  value  of  gold  and  silver  is  closely  related  to  the  cost  of 
production.  The  chief  factors  that  affect  the  supply,  and 
therefore  the  cost,  are  the  existence  or  discovery  of  new  stocks, 
and  improvements  in  methods  of  extraction. 

The  ascertainment  of  new  sources  of  supply  is  largely  a  mat- 
ter of  chance.  To  speak  only  of  modern  times,  there  have 
been  four  such  fundamental  changes:  the  opening  of  the  Potosi 
mines  in  the  sixteenth  century,  the  discovery  of  gold  in 
California  and  Australia  around  1850,  the  development  of  the 
Comstock  silver  lode  in  Nevada  in  the  seventies,  and  the  great 
increase  in  the  output  of  gold  in  Africa  and  the  Klondike  at  the 
close  of  the  century.  In  the  methods  of  operation  also  there 
have  been  great  changes  from  the  early  "placers,"  to  the  modern 
cyanide  process.  It  must  not  be  overlooked,  however,  that 
the  supply  itself  is  affected  by  the  value.  If  gold,  for  instance, 
should  become  relatively  scarce,  and  rise  in  value,  all  the  com- 
modities, including  the  wages  of  hired  labor  for  which  the 
miner  exchanges  his  gold,  would  fall  in  price,  and  the  resulting 
increase  of  profits  would  lead  him  to  use  lower-grade  ore  and 
to  increase  the  output.  Per  contra,  a  great  increase  and  cheapen- 
ing of  output  means  a  fall  in  the  value  of  gold  or  a  rise  in  the 
general  price  level,  and  this  increased  cost  or  lower  profits 
will  lead  the  miner  to  restrict  his  operations  to  the  better-grade, 
and  hence  the  less  abundant,  ore.  Thus  in  the  case  of  tne  metal 
used  as  the  money  standard,  a  relative  abundance  or  dearth  tends 
to  correct  itself  automatically,  rendering  improbable  any  con- 
tinuous and  permanent  increase  or  decrease  in  the  value  of 
money.  Within  these  broad  limits,  however,  there  is  still  ample 
room,  as  we  have  seen,  for  oscillations  in  the  price  level. 

The  conditions  of  supply  throughout  most  of  recorded  his- 


4/6  Money,  Practical  Problems  [§  193 

tory  have  been  such  as  to  make  gold  far  more  valuable  than 
silver.  We  arc  told,  indeed,  that  in  early  times  in  Arabia  silver 
was  worth  more  than  gold,  and  we  know  that  when  Japan  was 
opened  to  the  Western  world  gold  was  worth  only  four  times 
as  much  as  silver.  In  classic  antiquity  the  value  of  gold  was 
far  higher.  At  one  time  in  Rome  the  ratio  was  as  high  as  17 
to  I.  The  discovery  of  the  gold  mines  in  Noricum  about  150 
B.  c.  changed  the  ratio  to  9  to  i,  and  in  the  early  empire  it  was 
about  II  to  I.  In  the  early  middle  ages  the  ratio  hovered 
about  10  to  I.  The  discovery  of  American  altered  it  to  15  to 
i;  and  the  revolutionary  changes  in  the  last  quarter  of  the 
nineteenth  century  resulted  in  a  ratio  of  as  much  as  30  and  40 
to  I  at  various  dates  between  1900  and  191 5. 

The  table  facing  page  478  will  show  the  changes  in  production 
since  the  discovery  of  America.  In  the  charts  opposite  pages 
476  and  477  the  same  facts  in  somewhat  greater  detail  are 
shown  for  the  more  important  periods  of  the  nineteenth 
century,  not  alone  for  the  world  in  general,  but  for  the 
United  States  in  particular.  In  the  table  facing  page  480  will 
be  found  the  salient  figures  illustrating  the  gradual  decline  in 
the  price  of  silver  from  1873  to  1892,  the  sudden  fall  during 
the  next  two  years,  and  the  fluctuations  thereafter.  The 
reasons  for  this  will  be  explained  later. 

In  view  of  the  changing  relations  of  gold  and  silver  the  prob- 
lem as  to  whether  both,  or  only  one,  and  if  so  which  one,  should 
be  used  as  the  money  standard  was  until  very  recently  a  subject 
of  serious  discussion.  The  problem  has  now  been  solved  by  the 
adoption,  wellnigh  throughout  the  entire  world,  of  the  gold 
standard  as  opposed  either  to  the  silver  standard  or  to  the 
conjoint  use  of  both  metals  under  the  name  of  bimetallism.^ 

1  The  word  "bimetallism"  was  originated  by  M.  Cernuschi  in  1869. 
Before  that,  the  term  "double  standard"  was  always  used.  Symnietal- 
lism,  as  a  kind  of  bimetallism,  proposes  a  single  coin  composed  of  the  two 
metals.  The  coins  of  classical  antiquity  were  sometimes  made  of  elec- 
tron, or  a  combination  of  gold  and  silver. 


PRODUCTION  OF  SILVER  IN  THE   PRINCIPAL  COUNTRIES  OF  THE 
WORLD  FROM   1875  TO  1919,  IN  TROY  OUNCES. 
1875  1880  1885  1890  1895  1900  1905  1910  1915 


1919 


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PRODUCTION  OF  GOLD  AND  SILVER  IN   THE  UNITED  STATES 
FROM   1845  TO  1919^ 


'*S§S«S'''«§SsSSSsSSS'^S^SS'^'^  "^^ 


PRODUCTION   OF   GOLD   IN  THE   PRINCIPAL  COUNTRIES  OF  THE  WORLD 
FROM    1880  TO   1919.  VALUES  IN   UNITED  STATES  CURRENCY 

1890      1895      1900      1905      1910      1915   1919 


1885 


$270, 


$255,000,Q00 


000,000 


$240,000,000 


$225,'000,000 


$195, 


$180,000,000 


$210J' 


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000,000 


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§  193]      Choice  of  the  Money  Standard        477 

The  history  of  the  evolution  of  the  gold  standard  may  be  divided 
into  several  periods:  (i)  the  alternating  standards  up  to  1816; 
(2)  the  embarrassments  of  bimetallism  to  187 1-3;  (3)  the 
struggle  for  silver  to  1900;  (4)  the  final  disappearance  of  the 
silver  standard  since  1900. 

In  the  early  middle  ages  the  currency  was  composed  almost 
entirely  of  copper  and  silver.  It  was  not  until  the  fourteenth 
century  that  the  needs  of  a  growing  commerce  led  to  the  intro- 
duction of  gold  coins  in  the  trade  centres.  As  both  gold  and 
silver  coins  of  definite  weight  and  fineness  circulated,  each 
country  practically  had  its  own  legal  ratio,  which  not  only 
differed  from  the  market  ratio  (varying  from  9  to  i  to  12  to  i) 
but  almost  invariably  differed  from  the  legal  ratio  in  the  other 
countries.  As  a  result  the  ratio  was  constantly  changed  by 
each  government  through  successive  recoinages,  now  of  gold, 
now  of  silver,  in  order  to  keep  the  coins  in  the  country,  the 
confusion  being  heightened  by  the  debasements  designed  to 
secure  a  profit  for  the  sovereign. 

No  one  but  a  few  keen  business  men,  primarily  Italians, 
Southern  Frenchmen  and  Jews,  who  took  advantage  of  these 
discrepancies,  comprehended  the  true  reason  of  the  alternating 
outflow  or  inflow  of  the  precious  metals  or  understood  the 
difference  between  coin  and  bullion  value.  What  is  to-day 
deemed  a  perfectly  legitimate  business  —  that  of  exporting 
gold  or  silver  —  was  then  considered  a  heinous  offence.  But 
neither  an  adverse  public  opinion  nor  drastic  legal  prohibitions 
were  of  avail  in  preventing  the  disappearance  now  of  gold,  now 
of  silver.  The  period,  in  short,  was  one  of  unconscious  bimetal- 
lism, with  virtually  an  alternating  standard  in  actual  circulation. 

In  the  sixteenth  century  came  the  discovery  of  the  American 
silver  mines  and  the  "revolution  of  prices,"  which  was  consum- 
mated by  1660,  when  the  market  ratio  had  risen  to  15  to  i,  a 
fall  of  about  50  per  cent  in  the  value  of  silver.  For  the  next 
two  centuries  the  relative  output  of  the  precious  metals  did  not 
alter  materially,  and  the  changes  in  the  market  ratio  were  only 


478  Money,  Practical  Problems  [§  193 

slight.  The  mint  ratios  in  the  various  countries  had  accom- 
modated themselves  somewhat  more  closely  to  the  marlcet 
ratio,  but  recoinages  and  oscillations  were  not  infrequent.  It 
happened  that  during  the  greater  part  of  the  eighteenth  century 
the  mint  ratio  in  France  and  most  of  the  continental  countries 
was  in  favor  of  silver,  while  in  England  it  chanced  to  be  in 
favor  of  gold.  As  a  consequence  the  actual  currency  at  the 
close  of  the  century  was  gold  in  England,  but  silver  in  France. 
This  largely  accidental  situation  had  important  consequences. 

In  France  the  mint  ratio  of  the  silver  ecus  to  the  gold  louis 
was  in  1726  14!  to  i,  which  resulted  practically  in  a  silver 
currency.  The  ratio  was  again  changed  in  1785  to  15I  to  i 
and  was  continued  by  the  law  of  1803,  which  adopted  the  dec- 
imal system,  made  the  silver  franc  of  five  grammes  the  unit, 
and  provided  for  20  and  40  franc  gold  pieces.  In  England,  on 
the  other  hand,  the  guinea,  which  had  become  since  1663  the 
chief  gold  coin,  was  intended  to  pass  at  20  shillings,  but  was 
actually  current  at  a  higher  figure.  The  recoinage*of  1696-8 
was  designed  to  furnish  a  better  silver  currency,  but  the  value 
of  22  shillings  assigned  to  the  gifinea  caused  the  silver  to  dis- 
appear. After  constant  changes  —  the  government  abandon- 
ing for  a  time  the  free  coinage  now  of  gold,  now  of  silver,  now 
raising  and  now  lowering  the  maximum  value  of  the  guinea  — 
its  value  was  definitely  fixed  in  1717  at  21  shillings,  equivalent 
to  a  ratio  of  15.21  to  i.  As  the  market  ratio  was  under  15  to 
I,  this  reduction  of  the  guinea  was  insufificient,  and  silver  con- 
tinued to  disappear,  only  the  poor  and  worn  pieces  remaining. 
From  1760  to  1773,  however,  the  market  ratio  changed  from  14! 
to  15^  to  I,  overtaking  the  mint  ratio,  so  that  gold  began  to  be 
exported,  only  the  poor  coins  remaining.  This  led  to  the  gold 
recoinage  of  1774,  when  silver  in  sums  over  £25  was  declared 
to  be  legal  tender  only  by  weight.  Although  this  provision 
expired  in  1783,  it  was  renewed  in  1798,  when  the  free  coinage 
of  silver  was  also  suspended.  Thus  by  the  end  of  the  century 
silver  had  become  subsidiary  money,  and  England  was  really 


PRODUCTION  OF   GOLD  AND   SILVER  SINCE  THE  DISCOVERY 
OF  AMERICA,  ooo  OMITTED. 


Gold 

Silver 

Total  for  Period 

Average 
^Annual 
Value  in 
Dollars 

Total  for  Period 

Annual 
Average 

Coining 
Value  in 

Dollars 

Fine 
Ounces 

Value  in 
Dollars 

Fine 
Ounces 

Coining 
\'alue  in 
DoUars 

I 493-1 5 20 

5,221 

$107,931 

§3,855 

42,309 

$54,703 

$1,954 

1521-1540 

5,525 

114,205 

4,759 

69.,  598 

89,986 

3,740 

1541-1560 

4,378 

90,492 

5,656 

160,287 

207,240 

12,952 

1561-1580 

4..39S 

90,917 

4,546 

192,578 

248,990 

12,450 

15S1-1600 

4,745 

98,095 

4,905 

269,353 

348,254 

17,413 

1601-1620 

5,478 

113,248 

5,662 

271,925 

351,579 

17,579 

1621-1640 

5,337 

110,324 

5,516 

253,085 

327,221 

16,361 

1641-1660 

5,639 

116,571 

5,828 

235,531 

304.525 

15,226 

.... 

1661-16S0 

5,954 

123,084 

6,154 

216,691 

280,166 

14,008 

16S1-1700 

6,922 

143,088 

7,154 

219,842 

284,240 

14,212 

14.81 

1701-1720 

8,243 

170,403 

8,520 

228,651 

295,629 

14,781 

15-04 

1721-1740 

12,268 

253,611 

12,681 

277,262 

358,480 

17,924 

14.94 

1741-1760 

15,824 

327,116 

16,356 

342,812 

443,232 

22,162 

14.14 

1761-1780 

13,313 

275,211 

13,761 

419,712 

542,658 

27,133 

14.72 

1781-1800 

11,4-39 

236,464 

11,823 

565,236 

730,810 

36,540 

15-68 

1801-1810 

5,716 

118,152 

ii,8is 

287,469 

371,677 

37,i6S 

15-77 

1811-1820 

3,6So 

76,063 

7,606 

173,857 

224.7S6 

22,479 

15.62 

1821-1830 

4570 

94,479 

9,44s 

148,070 

191,444 

19,144 

15-82 

1S31-184P 

6,523 

134.841 

13.484 

191,759 

247,93c 

24,793 

15.62 

1S41-1850 

17,605 

363,928 

36,393 

250,903 

324,400 

32,440 

15-70 

1851-1855 

32.051 

662,566 

132,513 

142,443 

184,169 

36,824 

15.38 

I 856-1 860 

32,431 

670,415 

134.083 

145,477 

188,092 

37,6iS 

15.29 

1861-1865 

29,748 

614.944 

122,989 

177,010 

228,861 

45,772 

15.44 

1866-1870 

31,350 

648,071 

129,614 

215,258 

278,313 

55,663 

15.57 

1871-1875 

27,955 

577,883 

115,577 

316,585 

409,322 

81,864 

16.64 

1876-1880 

27,715 

572,931 

114,586 

393,878 

509,256 

101,851 

1 8.05 

1881-1885 

23,074 

495,582 

99,116 

460,020 

594.773 

118,955 

19-41 

I 886-1 890 

27,306 

564.474 

112,895 

544,557 

704,074 

130,815 

19.75 

1S91-1895 

39,413 

814,786 

162,947 

787,907 

1,108,708 

203,742 

31.60 

I 896- I 900 

62,235 

1,286,505 

257,301 

828,467 

1,071,148 

214,230 

33-33 

1 90 1- 1 90s 

77,890 

1,610,310 

322,061 

825,140 

1,066,848 

213,370 

33.87 

1906-1910 

103,357 

2,166,603 

433,321 

986,585 

1.274,411 

254.882 

38.22 

1911-1915 

111,157 

2,292,558 

458,512 

1,014,791 

1,283,437 

256,687 

36.67 

1916 

21,971 

454,176 

454,176 

161,178 

218,302 

218,302 

30.11 

1917 

20,491 

423,590 

423,590 

163,993 

225,212 

225,212 

23.09 

1918 

18,557 

383,605 

383,605 

198,168 

256,218 

256,218 

21.17 

1919 

17,665 

365,166 

365,166 

174,517 

225,638 

225,638 

18.44 

THE 

FALL  IN  THE  VALUE  OF  SILVER  SINCE  1873 

London  Price  per 

Equivalent 

Bullion 

Market 

Year 

oz.  of  Bar  Silver, 

Price  in  Dollars 

Value  of 

Ratio  of 

Ending 

British  Standard 

per  oz. 

Silver 

Silver  to 

June  30 

(■92s) 

of  Fine  Silver 

Dollar 

Gold 

1873 

59  nod 

I    298 

I  .004 

15-93 

1874 

58^6d. 

1.278 

989 

16. 

16 

1875 

56!Ji6d. 

I 

242 

961 

16 

64 

1876 

53K8d. 

I 

164 

900 

17 

75 

1877 

54%d. 

I 

202 

930 

17 

20 

1878 

525^d. 

I 

154 

892 

17 

92 

1879 

5iJ4d. 

I 

124 

869 

18 

39 

1880 

52Md. 

I 

145 

886 

18 

05 

1881 

5i^d. 

I 

132 

876 

18 

25 

1882 

51  %d. 

I 

136 

878 

18 

20 

1883 

5oMd. 

I 

109 

858 

18 

64 

1884 

50% 

I 

III 

859 

18 

61 

1885 

.      A^% 

I 

065 

824 

19 

41 

1886 

45^ 

995 

769 

20 

78 

1887 

44'ir6 

979 

758 

21 

10 

1888 

42% 

940 

727 

22 

50 

1889 

42M 

935 

723 

22 

10 

1890 

47M 

I 

046 

809 

19 

75 

189I 

45JI6 

988 

764 

20 

92 

1892 

39M 

871 

674 

23 

72 

1893 

35% 

780 

604 

26 

49 

1894 

28% 

635 

491 

32 

56 

1895 

29!,¥6 

654 

506 

31 

60 

1896 

30l?lG 

676 

523 

30 

59 

1897 

27.«l6 

604 

467 

34 

20 

1898 

2(>% 

590 

456 

35 

03 

1899 

2l}i 

602 

465 

34 

36 

1900 

28^6 

620 

480 

33 

33 

I90I 

27^16 

596 

461 

34 

68 

1902 

243-16 

528 

408 

39 

15 

1903 

24% 

543 

420 

38 

10 

1904 

26i| 

579 

448 

35 

70 

1905 

27'^16 

610 

472 

33 

87 

1906 

3oJ^8 

677 

523 

30 

54 

1907 

30^16 

661 

512 

31 

24 

1908 

24M 

535 

414 

38 

64 

1909 

23M 

520 

402 

39 

74 

I9IO 

24f| 

540 

418 

38 

22 

I9II 

24if 

539 

417 

38 

33 

I912 

28M 

615 

475 

33 

62 

I913 

21% 

605 

487 

34 

19 

I914 

25H 

553 

.428 

37 

•34 

I915 

23^ 

519 

.401 

39 

•84 

I916 

315^ 

687 

•531 

30 

.11 

I917 

403f6 

875 

.692 

23 

09 

1918 

47H 

981 

.761 

21 

13 

1919 

r-    1 
5/32 

I 

125 

.867 

18 

44 

§  ig4]  Bimetallism  479 

on  a  gold  basis.  It  was,  however,  not  until  1816  that  the  gold 
standard  was  definitely  adopted,  silver  being  frankly  made 
token  money  by  becoming  legal  tender  only  up  to  40  shillings, 
and  by  being  henceforth  coined  only  on  government  account. 
A  pound  of  silver  f  0  fine  is  since  then  cut  into  66  shillings,  but 
issued  to  the  public  at  62  shillings;  while  any  one  is  entitled  to 
receive  for  an  ounce  of  standard  gold  H  fine  £3  175.  lo^d.,  or  in 
cash  from  the  Bank  of  England  (because  of  delay  in  coinage) 
£3  175.  gd. 

194.    Bimetallism 

In  the  other  countries  the  problem  was  yet  to  be  solved. 
In  the  United  States,  Hamilton,  in  following  the  custom  of  the 
time,  had  recommended  the  use  of  both  metals  at  a  ratio  of 
15  to  I  (3711  grains  silver  and  24!  grains  gold  to  the  dollar). 
The  market  ratio,  which  had  been  a  little  less  than  that  in  1790, 
rose  to  a  little  more  after  1794;  but  the  discrepancy  was  not 
serious.  After  1820,  however,  the  market  ratio  varied  from 
15.6  to  15.8  to  I,  and  gold  as  the  undervalued  metal  began  to 
leave  the  country.  To  remedy  this  state  of  affairs  the  eagle 
was  in  1834  reduced  to  258  grains  standard  and  232  grains  fine, 
making  the  ratio  16.002  to  i;  while  in  1837,  the  standard  weight 
remaining  the  same,  the  fineness  was  made  to  conform  to  that 
of  silver  (A),  with  a  resulting  fine  content  of  232.2  grains  or  a 
ratio  of  15.998  to  i.  This  virtual  ratio  of  16  to  i  caused  gold 
now  to  be  the  overvalued  metal,  and  silver  was  gradually  ex- 
ported. The  transition  was  especially  marked  in  the  later 
forties  until,  in  order  to  keep  the  small  silver  in  the  country, 
the  weight  of  all  the  subsidiary  coins  was  reduced  in  1853. 
Practically,  thus,  the  country  had  come  to  be  on  a  gold  basis. 
The  question,  however,  now  aroused  no  interest,  because  the 
actual  currency  consisted  of  state  bank  notes  until  the  civil 
war,  and  of  greenbacks  and  national  bank  notes  thereafter. 

In  France,  where  up  to  1850  the  mint  ratio  of  155  to  i  was 
slightly  below  the  market  ratio,  gold  gradually  disappeared, 
leaving   the   country   to   all   intents  on   a   silver   basis.     From 


480  Money,  Practical  Problems  [§  194 

1850  on,  however,  the  markel  ratio  fell  below  152  to  i.  Gold 
began  to  be  imported,  and  Franee  was  slowly  being  drained  of 
its  silver.  The  difficulty  finally  became  so  serious  that  France 
formed,  in  1865,  together  with  Belgium,  Italy,  and  Switzerland, 
the  Latin  Union.  Greece  joined  in  1868,  and  at  various  later 
dates  Spain,  Roumania,  Servia,  and  Bulgaria  patterned  their 
systems  on  that  of  the  Union.  This  agreement,  while  not 
affecting  the  old  silver  five-franc  pieces,  reduced  the  fineness  of 
the  subsidiary  silver  coins,  and  made  them  legal  tender  only  to 
fifty  francs  between  individuals  and  to  one  hundred  francs  in 
payments  to  the  government,  their  coinage  by  the  respective 
states  being  limited  to  six  francs  per  capita.  The  coins  cir- 
culated interchangeably  and  each  state  bound  itself  to  redeem 
its  own  coins  in  gold  or  five-franc  pieces  for  a  period  of  two 
years  beyond  the  termination  of  the  Union. 

In  the  other  countries  the  unrest  grew.  Portugal  followed 
England  in  adopting  the  gold  standard  in  1854,  and  the  first 
international  monetary  congress,  held  in  Paris  in  1867,  pro- 
nounced itself  in  favor  of  the  same  scheme.  Germany  also 
took  advantage  of  the  victory  over  France  to  adopt  the  gold 
standard  in  1871-1873.  The  new  silver  mark  was  to  be  legal 
tender  only  to  20  marks  ($5),  although  the  old  Vereinsthaler 
still  remained  legal  tender.  Free  coinage  of  silver,  however, 
was  discontinued,  and  much  of  the  old  silver  was  thrown  on 
the  market  to  be  sold.  The  Scandinavian  monetary  union  also 
adopted  the  gold  standard  in  1873.  These  measures,  coupled 
with  the  discovery  of  the  Comstock  lode,  combined  to  depress 
the  price  of  silver  and  to  bring  the  difficulties  of  bimetallism  to 
a  head  in  the  other  countries. 

The  Latin  Union  was  now  flooded  with  silver  under  the  free 
coinage  provision  and  was  threatened  with  a  loss  of  its  gold. 
Belgium  had  already  provisionally  suspended  free  coinage  in 
1873,  and  France  followed  in  1876.  Finally,  in  1878  the  Latin 
Union,  definitely  abrogated  the  free  coinage  of  the  five-franc 
pieces.     Thus    was    introduced    the    "limping"    or    "halting" 


§  194]  Bimetallism  "  481 

standard,  so  called  because  silver  now  lost  one  of  the  two  sup- 
ports —  legal  tender  and  free  coinage  —  which  are  essential  to 
real  bimetallism. 

Free  coinage  was  technically  permitted,  but  it  was  provided 
that  any  state  adopting  this  system  could  not  circulate  its 
silver  coins  in  the  other  countries,  and  would  be  obligated  to 
redeem  in  gold  the  five-franc  pieces  of  the  other  countries. 
This  meant,  of  course,  that  free  coinage  was  practically  im- 
possible. Moreover,  if  the  union  should  be  terminated  at 
any  time,  each  state  was  held  to  redeem  its  five-franc  pieces 
circulating  in  any  other  country.  Thus  was  added  to  the  sus- 
pension of  free  coinage  the  principle  of  redemption  of  the  silver 
currency  in  gold.  Owing  to  the  fact  that  France  holds  large 
quantities  of  silver  coined  by  the  other  members  of  the  Union, 
some  of  which  would  find  great  difficulty  in  redeeming  their 
quota,  the  Union  bids  fair  to  continue  for  a  long  period.  To 
all  intents,  however,  the  Latin  Union  has  been  on  a  gold  basis 
since  1878  because  although  the  silver  five-franc  coins  are  still 
full  legal  tender,  there  is  no  free  coinage,  and  the  value  of  what 
is  virtually  a  token  money  is  kept  at  parity  with  that  of  the 
gold-standard  money  by  a  limitation  of  the  quantity  coined 
and  by  its  acceptance  at  the  treasury  for  public  dues. 

In  the  United  States  the  agitation  did  not  begin  until  the 
fall  in  the  price  of  silver  had  become  marked  in  1875.  The  act 
of  1873  omitted  the  silver  dollar  from  the  list  of  American  coins, 
largely  because  of  the  fact  that  for  years  no  such  dollars  had 
been  coined.  The  few  outstanding  dollars,  however,  retained 
their  full  legal  tender  quality  until  1874,  when  the  revised 
statutes,  reenacting  the  subsidiary  silver  law  of  1853,  provided 
■that  "the  silver  coins"  of  the  United  States  should  be  legal 
tender  only  to  five  dollars.  The  American  silver  producers 
now  thought  that  the  fall  in  the  price  of  silver  could  be  arrested 
by  an  artificial  increase  of  the  demand,  and  the  Bland-Allison 
act  of  1878  directed  the  secretary  of  the  treasury  to  purchase 
monthly  at  the  market  price  not  less  than  two,  nor  more  than 
31 


482  Money,  Practical  Problems  [§  194 

four,  million  dollars'  worlh  of  silver  bullion,  and  to  coin  il  into 
the  standard  silver  dollars,  which  were  again  made  legal  tender. 
For  each  dollar,  so  coined  and  kept  in  the  treasury,  silver  cer- 
tificates were  to  be  issued. 

Neither  this  act  nor  the  suspension  in  1878  of  the  sales  of 
the  old  Thaler  by  Germany  served  to  arrest  the  fall  in  the  price 
of  silver.  The  gold  standard  had  been  virtually  adopted  by 
the  Netherlands  in  1875-6,  and  in  1885  it  was  introduced  into 
Egypt.  The  Western  farmers  now  began  to  ascribe  the  low 
price  of  wheat  to  the  competition  in  the  silver-standard  coun- 
tries, and  demanded  the  remonetization  of  silver  in  the  belief 
that  this  would  increase  prices.  The  union  of  the  farmers  with 
the  mine  owners  led  to  a  renewed  agitation  for  free  silver,  the 
resvdt  being  a  compromise  measure  known  as  the  Sherman 
law  of  1890.  This  act  abrogated  the  law  of  1878  (under  which 
a  total  of  370  million  silver  dollars  had  been  coined),  and  sub- 
stituted the  monthly  purchase  by  the  government  of  four  and 
a  half  miUion  ounces  of  silver,  at  the  market  price,  to  be  paid 
for  in  new  Treasury  Notes,  which  were  to  be  redeemable  in  gold 
or  silver  coin.  After  July  i,  1891,  the  coinage  of  the  silver 
dollars  was  to  cease,  except  so  far  as  it  might  be  necessary  to 
secure  the  outstanding  treasury  notes. 

In  the  course  of  a  few  years  the  gradual  accumulation  of 
silver  drove  out  the  gold  and  endangered  the  stability  of  the 
gold  reserve.  When  the  government  of  India  closed  its 
mints  to  the  free  coinage  of  silver,  a  crisis  ensued,  and  led  in 
November,  1893,  to  the  hasty  repeal  of  the  Sherman  law,  under 
which  168,674,682.53  fine  ounces  had  been  purchased  at  a  cost 
of  $155,931,002.25.  With  this  came  to  an  end  the  govern- 
ment's effort  to  create  an  artificial  market  for  silver  as  a  stej^ 
ping-stone  to  bimetallism.  As  a  result  of  the  Indian  and  Ameri- 
can measures  the  price  of  silver  now  dropped  enormously,  the 
ratio  jumping  from  19-4  to  i  in  1890  to  32^  to  i  in  1894. 

From  now  to  the  end  of  the  century  came  the  acute  struggle 
in  the  United  States  and  the  progressive  adoption  of  the  gold 


§  195]     Adoption  of  the  Gold  Standard         483 

standard  elsewhere.  In  1892  it  had  been  introduced  into 
Austria,  followed  by  Chile  in  1895,  Costa  Rica  in  1896,  and 
Russia  and  Japan  in  1897.  In  the  same  year  Peru  suspended 
the  free  coinage  of  silver,  in  1898  Ecuador  limited  its  legal 
tender,  and  in  1899  India  adopted  the  gold  standard.  In  the 
United  States  a  fierce  presidential  campaign  was  waged  in 
1896  for  the  complete  remonetization  of  silver  at  the  old  ratio 
of  16  to  1. 

The  defeat  of  the  silver  agitation  was  followed  by  the  act  of 
1900,  which  defined  as  the  standard  the  gold  dollar.  It  was 
provided  that  all  forms  of  money  issued  or  coined  by  the  govern- 
ment should  be  maintained  at  a  parity  with  the  standard,  and 
that  the  United  States  notes  (greenbacks)  and  treasury  notes 
should  be  redeemed  in  gold  coin  and  not  reissued  except  in 
exchange  for  gold;  and  for  such  redemption  purposes  a  reserve 
fund  of  150  millions  of  gold  was  created.  Whenever  the  fund 
should  fall  below  this  figure  the  issue  of  gold  certificates  was  to 
cease, ^  and  the  secretary  of  the  treasury  was  empowered  to  sell 
bonds  to  replenish  it.  Finally,  the  treasury  notes  of  1890  were 
to  be  cancelled  and  replaced  by  silver  certificates  as  fast  as  the 
silver  bullion  bought  under  the  Sherman  act  might  be  coined. 
Thus  the  United  States  placed  itself  in  line  with  the  other  gold- 
standard  nations. 

195.   The  Adoption  of  the  Gold  Standard 

The  gold  standard  had  now  been  adopted  in  the  most  im- 
portant countries.  But  there  remained  some  of  the  American 
republics,  the  colonial  possessions  of  the  United  States  and  a 
large  part  of  Asia,  still  on  the  silver  standard.  In  almost  all 
of  these  countries  the  currency  was  composed  exclusively  of 
silver,  and  the  situation  had  become  wellnigh  intolerable  to 
merchants  and  others  having  foreign  dealings,  because  of  the 
so-called   "dislocation  of   the  exchanges,"   whereby  purchasers 

'  In  1906  the  limit  was  reduced  so  that  the  issue  of  gold  certificates  is 
to  cease  only  when  the  fund  falls  below  fifty  millions. 


484  Money,  Practical  Problems  [§  195 

of  bills  of  exchange  (see  §  198)  were  exposed  to  the  continual 
fluctuations  in  the  silver  which  they  paid  or  received  for  the 
bills.  In  the  more  important  states,  however,  it  would  have 
been  entirely  too  costly  either  to  melt  down  the  old  silver 
currency  or  to  purchase  enough  gold  to  serve  as  a  circulating 
medium.  It  was  necessary  to  devise  some  method  which 
would  furnish  the  chief  advantages  of  the  gold  standard  and 
yet  retain  the  circulation  of  silver.  The  first  country  to  under- 
take this  task  was  India. 

India  was  in  a  peculiarly  embarrassing  condition  because  the 
fall  in  the  price  of  silver  caused  the  government  a  constantly 
increasing  loss  in  the  large  remittances  which  it  was  obliged  to 
make  in  gold  to  the  mother  country  for  interest  on  the  debt 
and  for  its  contribution  to  imperial  expenditures..  The  Indian 
standard  was  the  silver  rupee,  originally  worth  about  two 
shillings,  but  which  had  fallen  by  1893  to  about  i4d.  The 
ordinary  mode  of  making  remittances  to  England  was  by  the 
India  Government  Council  in  London  selling  to  merchants  who 
had  bought  goods  in  India  bills  of  exchange,  known  as  Council 
Bills,  and  payable  in  rupees  in  India  by  the  government.  The 
Indian  government  now  in  1893  suspended  the  free  coinage  of 
silver,  and  declared  that  it  would  sell  bills  of  exchange  in  Lon- 
don, or  mint  rupees  in  India  in  exchange  for  gold,  at  the  rate 
of  15  rupees  to  a  pound,  or  i6d.  for  a  rupee  —  equivalent  to  a 
ratio  of  about  22  to  i.  Although  gold  was  not  legal  tender, 
the  government  agreed  to  accept  it  in  payment  of  public  dues. 
The  object  of  these  measures  was  to  Hmit  the  coinage,  and 
hence  the  quantity,  of  the  rupees  in  the  hope  that  their  value 
would,  in  the  face  of  an  increasing  demand,  gradually  rise  to 
the  desired  par.  After  two  or  three  years  the  stationary  cur- 
rency in  the  face  of  growing  population  and  business  meant  a 
relative  contraction,  and  the  gold  price  of  the  rupee  gradually 
rose  until,  by  1898,  it  reached,  and  even  slightly  exceeded,  the 
desired  par  of  i6d.  As  a  consequence,  gold  now  began  to  flow 
into  India,  because  there  was  a  profit  in  tendering  it  to  the 


§  195]       Adoption  of  the  Gold  Standard         485 

government  for  silver.  This  permitted  the  government  to  ac- 
cumulate a  reserve  of  gold,  and  in  1899  India  decided  to  adopt 
the  gold  standard,  declaring  gold  coins  to  be  legal  tender  at  the 
rate  of  15  rupees  for  a  sovereign.  In  1920,  as  a  result  of  the  price 
changes,  this  was  altered  to  10  rupees.  In  India,  therefore,  the 
rupees  still  have  unlimited  legal  tender,  but  are  virtually  a  token 
currency,  because  there  is  no  free  coinage.  Gold,  but  not  silver, 
can  be  tendered  at  the  reserve;  and  while  the  Indian  government 
will  take  gold  in  exchange  for  rupees,  it  is  under  no  obligation 
to  pay  out  gold.  As  long,  however,  as  the  free  coinage  of  silver 
is  suspended,  the  government  is  able  to  maintain  the  value  of  the 
rupees  by  coining  only  as  many  as  are  necessary,  procuring  the 
silver  for  this  purpose  by  selling  gold.  Thus  the  gold  standard 
is  automatically  preserved  through  the  paper  currency  reserve, 
although  the  currency  is  composed  of  token  silver  and  paper  notes. 
The  same  principle,  although  in  a  slightly  different  form,  was 
adopted  in  the  Philippines  in  1903,  under  what  has  become 
known  as  the  gold-exchange  standard.  The  unit  of  value  was 
made  the  geld  peso,  but  the  actual  coins  were  the  new  silver 
pesos.  The  pesos,  in  lieu  of  which  silver  certificates  may  be 
emitted,  are  legal  tender,  but  can  be  coined  only  on  govern- 
ment account.  In  order  to  keep  the  silver  coins  at  a  parity  with 
gold,  and  in  order  to  redeem  the  silver  certificates,  the  govern- 
ment maintains,  in  both  the  Philippines  and  New  York,  a  cur- 
rency reserve  fund  against  which  bills  of  exchange  are  sold 
at  a  fixed  rate  whenever  there  is  a  demand  for  gold  for  making 
payments  abroad.  If  there  is  a  danger  of  a  scarcity  of  money, 
the  government  can  put  more  pesos  into  circulation;  and  if 
there  is  an  imminent  excess  of  silver,  with  a  resultant  rise  of 
prices  which  would  normally  mean  an  export  of  coin,  the 
government  stands  ready  to  sell  drafts  upon  its  gold  fund 
abroad  at  a  fixed  price.  The  local  silver  coins  paid  for  such 
drafts  are  then  withdrawn  from  circulation,  thus  diminishing 
the  redundancy  of  the  currency  and  causing  prices  to  fall.  If 
prices  threaten  to  fall  too  far,  and  there  is  a  renewed  demand 


486  Money,  Practical  Problems  [§  195 

for  silver  money,  gold  may  be  deposited  in  the  local  reserves, 
setting  free  a  corresponding  amount  of  silver  currency.  In  this 
way  a  stability  of  value  is  attained. 

The  ratio  selected  was  32  to  i.  This  was  supposed  to  be 
a  safe  margin;  but  silver  unexpectedly  rose  in  price,  and  by 
1906  was  worth  3if^.  an  ounce,  equivalent  to  less  than  30  to 
I.  In  order,  therefore,  to  prevent  the  disappearance  of  the 
silver  pesos,  the  act  of  1906  provided  for  a  recoinage,  reducing 
the  fineness  of  the  peso.  The  act  also  authorized  the  deposit 
in  the  Philippine  treasury  of  United  States  gold  coin  for  cer- 
tificates hereafter  to  be  coined,  up  to  60  per  cent  of  the  total 
issues.  Thus  not  only  is  the  uncoined  gold  peso  the  standard, 
but  the  government  paper  currency  becomes  in  major  part  a 
currency  of  gold  certificates. 

In  1904  Panama  adopted  the  same  system,  the  monetary 
gold  unit,  not  coined,  being  the  balboa,  equivalent  to  an  Ameri- 
can dollar.  The  silver  peso  is  full  legal  tender,  but  as  there  is 
no  free  coinage,  it  is  really  a  token  coin,  and  officially  spoken 
of  as  fractional  currency.  Its  parity  of  value  with  gold  is 
insured  by  a  deposit  in  the  United  States  of  a  gold  reserve  equal 
to  15  per  cent  of  the  issue,  on  which  bills  of  exchange  may  be 
drawn  in  case  of  need. 

Mexico  also  adopted  the  gold-exchange  standard  in  1905, 
but  reached  in  1907  the  full  gold  standard,  with  a  large  actual 
circulation  of  gold. 

Finally,  the  Straits  Settlements  decided  in  1906  to  adopt 
the  method  pursued  in  India  from  1893  to  1899,  rather  than 
the  gold-exchange  standard.  It  fixed  the  sterling  value  of  the 
new  silver  dollar,  established  in  1903  and  not  subject  to  free 
coinage,  at  2s.  ^d.  by  offering  to  give  dollars  in  new  silver  notes 
for  sovereigns  at  that  rate.  As  the  government  has  not  yet 
(1914)  offered  to  give  sovereigns  in  exchange  for  dollars,  only 
an  upper  limit  to  the  fluctuation  of  the  silver  dollar  has  thus 
far  been  fixed.  But  a  gold  reserve  was  estabHshed  in  1908 
out  of  the  profits  of  the  silver  coinage,  and  the  weight  of  the 


§  195]     Adoption  of  the  Gold  Standard        487 

dollar  was  reduced  in  1907.  The  Straits  Settlements  ought 
accordingly  soon  to  reach  the  position  attained  by  India  in 
1899,  and  be  ready  for  a  gold  standard. 

Thus,  of  the  countries  on  the  silver  standard  there  remained 
in  1914  only  Bolivia,  China,  a  part  of  Central  America,  the 
minor  British  colonies  in  the  Orient,  and  Indo-China;  and  it  is 
to  be  expected  that  despite  peculiar  difficulties  incident  to  some 
of  these  nations,  they  will  also  before  long  follow  the  example 
of  India,  the  Philippines  or  Mexico. 

We  see  therefore  that  the  gold  standard  has  been  wellnigh 
universally  adopted  in  one  of  several  ways: 

(i)  The  gold  standard  proper,  with  a  gold  coinage  and  where 
there  is  neither  free  coinage  nor  full  legal  tender  for  silver,  as 
in  England,  Germany  and  the  United  States. 

(2)  The  limping  standard,  with  a  gold  coinage,  where  the 
silver  still  possesses  unlimited  legal  tender  but  is  kept  at  a 
parity  with  gold  by  the  abrogation  of  free  coinage  and  by  the 
offer  of  redemption  in  gold.  This  is  the  case  in  the  Latin  Union, 
in  India  and  in  Mexico. 

(3)  The  exchange  standard,  where  the  actual  currency  is 
full  legal-tender  silver  kept  at  a  parity  with  gold,  not  only  by 
the  suspension  of  free  coinage  but  by  the  adoption  of  either 
(a)  the  gold-exchange  method,  where  gold,  although  not  coined, 
becomes  the  standard  and  where  the  silver  is  redeemable  in 
gold  exchange;  or  what  may  be  called  {b)  the  fixity-of -exchange 
method,  where  gold  is  not  yet  the  standard,  but  where  the 
silver  coin  is  pulled  up  to,  or  kept  at,  a  fixed  value  by  the  re- 
striction of  the  coinage  coupled  with  the  offer  to  give  silver 
coins  in  exchange  for  gold  at  a  fixed  price.  Of  these  two 
methods  the  former  is  preferable,  because  it  does  not  neces- 
sarily involve  any  alteration  in  the  money  unit  or  the  domes- 
tic price  level.  The  latter  is  open  lo  the  objection  that  the 
sudden  raising  of  the  silver  unit,  or  appreciation  of  money, 
involves  a  decline  of  prices  with  all  the  perturbations  and 
disorders    incident    thereto.      Furthermore,   under    the   former 


488  Money,  Practical  Problems  [§  196 

method,  gold  or  gold-exchange  is  paid  out  for  silver,  as  well  as 
silver  for  gold,  thus  setting  an  inferior  as  well  as  a  superior 
limit  to  the  fluctuations  of  the  par  of  exchange. 

Thus  the  evolution  of  the  money  standard  has  completed 
its  natural  course.  At  the  outset  of  civilization  a  metal  of 
slight  value  suffices;  with  the  growth  of  trade  a  more  precious 
metal  is  necessary;  and  finally  with  the  highest  development 
of  industry  the  most  valuable  metal  becomes  the  standard. 

While,  however,  gold  is  now  the  standard,  the  money  in 
actual  circulation  in  modern  times  is  in  almost  all  progressive 
countries  coming  to  be  in  more  or  less  substantial  proportions 
money  made  of  paper,  rather  than  of  metal.  To  this  we  must 
now  turn  our  attention. 

196.   Paper  Money 

Paper  money  as  opposed  to  metallic  money  may,  as  we  have 
learned  (p.  451),  be  classified  into  fiduciary  or  credit  money, 
representative  money  and  fiat  money. 

(i)  In  one  sense  all  money,  paper  and  metallic,  is  credit 
money,  in  that  the  value  of  all  money  rests  at  bottom  on  the 
beUef  that  other  people  will  receive  it  in  exchange.  In  the 
narrower  sense,  however,  credit  money  means  money  issued 
by  credit  institutions.  Credit  money,  then,  consists  chiefly  of 
bank  notes,  which  are  usually  convertible  into  coin  and  are 
not  legal  tender.  When,  however,  they  are  both  inconvert- 
ible and  legal  tender,  they  become  in  many  respects  practically 
indistinguishable  from  fiat  money.  Credit  money  will  receive 
a  fuller  discussion  in  chapter  xxxi. 

(2)  Representative  money  consists  of  paper  which  certifies 
that  an  equivalent  amount  of  coin  or  bullion  is  deposited  in  the 
government  treasury.  It  is  thus  in  the  nature  of  a  warehouse 
receipt,  and  is  virtually  equal  to  coin,  the  chief  advantage  con- 
sisting in  the  fact  that  it  affords  the  public  a  more  convenient 
medium  of  exchange.  The  larger  part  of  the  paper  circulation 
of  the  United  States  is  composed  of  these  coin  certificates. 


§  iq6]  Paper  Money  489 

The  gold  certificates  were  originally  authorized  in  1863,  in 
denominations  of  $20,  on  deposit  of  gold  coin  or  bullion.  Their 
issue  was  suspended  in  1878  (in  order  to  facilitate  the  resump- 
tion of  specie  payments),  authorized  anew  in  1882,  again  sus- 
pended in  1893  (when  the  gold  reserve  was  being  depleted  by 
the  silver  agitation),  and  reauthorized  in  1900.  It  was  then 
provided  that  their  issue  be  suspended  when  the  gold  reserve 
kept  in  the  treasury  for  the  redemption  of  the  United  States 
notes  and  treasury  notes  falls  below  100  millions,  a  danger 
limit  which  was  reduced  in  1906  to  50  millions.  The  gold 
certificates  are  not  legal  tender,  but  are  receivable  for  customs, 
taxes,  and  public  dues,  and  may  be  counted  as  part  of  the  law- 
ful money  reserve  of  the  national  banks.  Since  1907  they  may 
be  issued  also  in  denominations  of  $10.  In  April,  192 1,  there 
were  419  millions  in  circulation.  Partly  like  these  gold  cer- 
tificates are  the  German  Reichskassenscheine ,  of  which  there  were 
outstanding  before  the  Great  War  1 20  million  marks,  covered  by 
an  equal  amount  of  gold  coin  in  the  fortress  of  Spandau. 

The  silver  certificates  were  issued  in  1878,  upon  silver  dollars 
deposited  in  the  treasury  or  coined  under  that  act.  The  de- 
nominations were  limited  to  ten  dollars  and  upward,  but  were 
changed  in  1886  to  one,  two,  and  five  dollars.  Like  the  gold 
certificates,  they  are  not  legal  tender,  but  are  receivable  for 
customs,  taxes,  and  public  dues,  and  may  be  counted  as  part 
of  the  lawful  reserve  of  the  national  banks.  In  April,  192 1, 
there  were  in  circulation  164  millions. 

While  representative  money  usually  represents  coin  or  bul- 
lion, we  occasionally  find  certificates  representing  the  standard, 
legal-tender,  fiat  paper  money.  In  that  case  the  certificates 
are  obviously  only  as  good  as  the  fiat  money  which  they  repre- 
sent. Of  this  character  were  the  currency  certificates  issued 
between  1872  and  1900  to  national  banks  in  large  denomina- 
tions on  deposit  of  United  States  notes,  and  utilized  chiefly 
in  settlement  of  clearing-house  balances. 

Analogous  to,  although  not  identical  with,  the  money  hitherto 


490  Money,  Practical  Problems  [§  196 

described,  is  the  paper  issued  by  goverumenl  in  relatively  small 
amounts  and  protected,  if  not  by  an  equivalent  quantity  of 
coin,  at  least  by  ample  reserves  of  bullion.  Of  such  character 
are  the  exchequer  notes  and  treasury  certificates  occasionally 
found  in  European  countries,  and  the  treasury  notes  issued  at 
various  periods  in  the  United  States.  Herein  may  also  be 
included  the  treasury  notes  of  1890,  issued  by  the  United  States 
in  that  year,  in  denominations  of  from  $1  to  $1000,  in  exchange 
for  the  silver  bullion  purchased  under  the  Sherman  law.  These 
notes  were  redeemable  in  coin  (gold  or  silver),  and  were  legal 
tender  for  customs  duties  and  for  all  private  debts  except  when 
otherwise  stipulated,  and  could  also  be  counted  as  a  part  of  the 
lawful  reserves  of  banks.  When  the  Sherman  act  was  repealed 
in  1893  their  further  issue  ($155,931,000  being  outstanding) 
was  stopped,  and  their  redemption  has  since  then  continued, 
until  in  April,  192 1,  only  $1,591,000  remained. 

(3)  Fiat  money,  i.  e.,  money  issued  on  the  simple  fiat  or 
declaration  of  government,  constitutes  the  typical  case  of 
paper  money.  Here  the  government  assigns  an  arbitrary  value 
to  a  piece  of  paper  and  invests  it  with  legal-tender  qualities. 
It  has  sometimes  been  questioned  whether  paper  of  this  kind 
is  really  money,  the  objection  being  made  that  in  order  to 
serve  as  a  measure  of  value  the  commodity  used  as  money  must 
possess  value  in  and  of  itself.  It  is  now,  however,  almost 
universally  conceded  by  careful  thinkers  that  money  cannot 
be  confined  to  that  made  of  metal,  and  that  paper  money  is 
money  in  precisely  the  same  sense  as  metallic  money.  It  may 
not  always  be  good  money,  and  it  is  undoubtedly  subject  to 
serious  dangers;  but  as  long  as  it  serves  as  a  medium  of  ex- 
change and  the  standard  in  which  accounts  are  kept,  it  is  none 
the  less  money.  Although  it  may  have  no  value  as  paper,  it 
may  possess  a  value  as  money  —  a  value  arising  from  the  de- 
mand for  it  for  monetary  purposes.  In  issuing  coins,  govern- 
ments, as  we  know,  often  charge  a  seigniorage,  making  a 
discrepancy  between  the  value  of  the  coin  and  that  of  the  bullion 


§  196]  Paper  Money  491 

in  the  coin.  As  Ricardo  first  showed,  paper  money  is  a  case 
where  the  seigniorage  amounts  to  loo  per  cent.  Even  debased 
coin,  i.  e.,  coin  whose  legal  value  far  surpasses  its  bullion  value, 
will,  as  we  pointed  out  in  the  discussion  of  Gresham's  law, 
retain  its  value  if  used  as  standard  money,  on  condition  that 
it  is  received  by  the  public  and  that  its  issue  is  so  limited  that 
the  total  supply  of  money  does  not  exceed  the  monetary  demand. 
Fiat  money  is  in  this  respect  comparable  to  debased  coin,  and 
may  equally  serve  as  the  standard  money. 

Fiat  money  is  almost  always,  but  not  necessarily,  paper 
money.  The  silver  rupee  in  India,  for  instance,  was  fiat  money 
from  1893  to  1899,  because  the  government  assigned  to  it  a 
higher  value  than  it  really  possessed  and  was  able,  by  limiting 
its  supply  in  the  face  of  a  growing  demand,  gradually  to  pull 
it  up  to  the  desired  level.  So  the  new  dollar  coined  in  1906 
by  the  Straits  Settlements  is  fiat  money,  i.  e.,  standard  money 
to  which  an  artificial  value  is  given  by  restricting  the  quantity. 
When  government  gives  an  artificial  value  to  subsidiary  money, 
like  the  American  fractional  currency,  we  usually  speak  of 
token,  rather  than  of  fiat,  money. 

Fiat  paper  money  (or  "soft"  money  as  opposed  to  "hard" 
or  metallic  money)  may  thus  perform  all  the  important  mone- 
tary functions  within  a  country.  Since,  however,  international 
debts  can  be  paid  only  in  gold  or  its  equivalent,  the  paper 
money  of  any  one  country  is  a  good  international  money  only 
so  far  as  it  preserves  its  value  in  reference  to  gold.  The  two 
causes  of  the  depreciation  of  irredeemable  fiat  money  —  i.  e., 
paper  which  the  government  refuses  to  redeem  in  coin  —  are 
over-issue  and  distrust. 

(a)  The  over-issue  of  fiat  money  means  that  the  supply, 
susceptible  of  easy  multiplication  by  the  printing  press,  may 
exceed  the  ordinary  monetary  demand  of  the  community.  In 
this  case  we  have  a  simple  illustration  of  the  quantity  theory 
of  money,  its  value,  after  a  certain  amount  has  been  issued, 
falling  at  a  rate  somewhat  proportionate  to  the  increase  in  the 


492  Money,  Practical  Problems  [§  196 

supply.  The  reader  need  not  be  reminded,  however,  thai  any 
concurrent  changes  in  the  demand  for  money,  as  explained  in 
§  187,  may  arrest  and  modify,  without  however  seriously  affect- 
ing, the  influence  of  an  over-issue. 

(6)  Distrust  of  the  government's  ability  ultimately  to  redeem 
the  fiat  money  is  ordinarily  the  consequence  of  the  mere  fact 
of  over-issue.  It  may,  however,  exert  an  independent  influ- 
ence, even  when  the  issue  is  not  redundant.  Thus,  during  the 
Civil  War  the  depreciation  of  the  greenbacks,  or  the  premium 
on  gold,  frequently  varied  with  the  military  outlook,  without 
any  synchronous  changes  in  the  supply  of  money  or  in  the 
other  factors  affecting  the  demand.  The  mere  afifixing  to  the 
greenbacks  of  a  promise  to  pay  is  as  unavailing  as  it  is  superflu- 
ous. For  fiat  money  retains  its  value  only  because  of  the 
public  belief  that  it  is  as  good  as  coin  and  that  the  government 
proposes  to  keep  it  so.  If  it  depreciates,  the  public  gauges 
the  government's  ability  to  redeem  it  by  the  actual  and  pro- 
spective economic  and  fiscal  conditions,  and  not  by  any  printed 
asseveration  of  intentions.  An  explicit  promise,  which  is  not 
observed,  is  less  good  than  an  implicit  promise  which  is  sup- 
ported by  the  facts.  What  gives  fiat  money  its  value  are 
facts,  not  promises. 

Although  fiat  money  was  first  used  in  China  in  the  twelfth 
century,  the  chief  examples  of  modern  times  date  from  the 
eighteenth  century,  and  are  found  in  America  and  France. 
Almost  all  the  American  colonies  issued  paper  money  with 
various  resultant  degrees  of  depreciation,  in  some  cases  as 
much  as  eleven  to  one,  until  stopped  by  the  British  laws  of 
1 751  and  1763.  In  the  Revolution,  fiat  money  was  again 
utilized  by  the  separate  commonwealths  as  well  as  by  the  con- 
federation, the  early  continental  issues  depreciating  to  such  an 
extent  that  within  a  few  years  they  were  redeemed  at  the  ab- 
surd figure  of  forty  for  one.  In  France  the  fiat  money  under 
the  Mississippi  scheme  of  John  Law  in  1716-1721  began  as  a 
convertible  bank-note  issue,  which  was  soon  made  inconvertible 


§  196]  Paper  Money  493 

and  legal  tender,  thus  becoming  indistinguishable  from  irre- 
deemable fiat  money,  and  through  its  collapse  bringing  France 
to  the  verge  of  ruin.  The  costly  experiment  was  not  renewed 
until  the  close  of  the  century,  when  an  endeavor  was  made  to 
finance  the  Revolution  by  the  issue  of  "assignats"  based  on 
land  security.  The  advantage  of  such  a  system  of  "land- 
notes"  is,  however,  illusory;  in  pre-revolutionary  Pennsylvania, 
where  they  were  also  tried,  the  depreciation  was  indeed  only 
moderate,  because  the  issue  was  restricted;  in  some  of  the 
other  colonies,  as  well  as  in  France,  where  this  precaution  was 
not  observed,  the  experiment  ended  in  dire  failure. 

Since  the  beginning  of  the  nineteenth  century,  while  numer- 
ous examples  of  depreciated  fiat  money  are  found  on  the  Eu- 
ropean continent  and  in  South  America,  the  two  chief  cases  of 
interest  to  us  are  the  Bank  Restriction  in  England  and  the 
issue  of  the  American  greenbacks.  In  England,  the  govern- 
ment, owing  to  the  contest  with  France,  and  solicitous  of  its 
specie  reserve  in  the  Bank  of  England,  procured  the  enactment 
of  a  law  in  1797  "restraining"  the  bank  from  making  specie 
payments.  The  convertible  bank  notes  thus  became  legal- 
tender  fiat  money,  and  depreciated  almost  fifteen  per  cent 
before  the  resumption  of  specie  payments  in  iSig. 

In  the  United  States,  on  the  outbreak  of  the  Civil  War,  a 
law  of  1 86 1  authorized  the  issue  of  fifty  (subsequently  increased 
to  sixty)  millions  of  demand  notes,  i.  e.,  notes  payable  on  de- 
mand. In  1 86  2  the  issue  was  increased  to  150  millions,  and 
the  notes  were  made  legal  tender  for  the  payment  of  all  debts, 
public  and  private,  except  customs  duties  and  interest  on  the 
public  debt.  The  lowest  denomination  had  originally  been  $5, 
but  smaller  issues  were  now  permitted.  Officially  they  were 
called  United  States  notes;  popularly  they  were  known  as  legal 
tenders  or,  from  their  color,  greenbacks.  Later,  in  1862,  the 
issue  was  increased  to  300,  and  in  1863  to  450  millions.  The 
result  of  this,  coupled  with  the  fortunes  of  the  war,  was  a  pro- 
gressive  depreciation,  reaching  its  climax  in  July,  1864,  when 


494  Money,   Practical  Problems  [§  196 

a  paper  dollar  was  worth  only  35  cents  in  gold.  In  1866  the 
retirement  of  the  notes  was  initiated,  at  the  rate  of  ten  millions 
a  month  for  six  months,  and  four  millions  a  month  thereafter. 
By  the  close  of  1867  the  amount  outstanding  had  been  reduced 
to  356  millions  when,  owing  to  the  fear  of  a  further  contrac- 
tion in  prices  and  the  spread  of  the  "soft-money  idea"  in  the 
Middle  West,  the  reduction  was  stopped  in  1868,  leading  to  a 
further  period  of  uncertainty  and  confusion.  During  the  panic 
of  1873  the  issues  were  augmented  to  382  millions,  but  after  the 
veto  by  President  Grant  of  the  "Inflation  Bill"  of  1874  to  in- 
crease the  greenbacks,  the  Resumption  Act  of  1875  provided 
for  a  retirement  at  the  rate  of  80  per  cent  of  the  national  bank 
notes  to  be  issued  in  their  stead.  On  May  31,  1878,  their  re- 
tirement was  stopped  at  the  accidental  figure  of  $346,681,016, 
and  the  amount  outstanding  has  remained  at  that  point  to  the 
present  day.  In  1879  the  resumption  of  specie  payments  was 
finally  accomplished,  and  the  greenbacks  have  ever  since  been 
forming  a  constantly  declining  proportion  of  the  American  paper 
circulation,  being  protected  and  kept  at  par  by  the  exist- 
ence of  the  gold  reserve.  In  1900  the  smallest  denomination 
permitted  was  ten  doUars,  but  in  1907  issues  of  one,  two,  and 
five  dollars  were  authorized. 

When  bank  money  loses  its  convertibility,  it  partakes,  especially 
when  invested  with  the  legal  tender  quality,  of  the  nature  of  gov- 
ernment or  fiat  money.  In  Europe,  as  the  result  of  the  Great 
War,  much  of  the  so-called  bank  money  has  in  fact,  if  not  always 
in  name,  gone  through  this  transition.  This  is  true  of  the  cur- 
rency notes,  issued  by  the  Treasury  in  England  against  com- 
mercial paper  deposited  by  the  banks,  of  the  German  banknotes, 
and  Darlehenskassenscheine  or  loan  bank  notes,  and  of  the 
French  bank  notes.  At  the  close  of  the  war  in  September,  1918, 
there  were  outstanding  in  Great  Britain  1,304  million  doUars  of 
currency  notes,  with  a  gold  cover  of  only  138  millions;  in  Ger- 
many 5,285  million  dollars  of  imperial  bank  notes  with  a  gold 
cover  of  538  millions;  and  in  France  5,838  million  dollars  of  bank 


§  196]  Paper  Money  495 

notes  with  a  gold  cover  of  664  millions.  When,  as  in  all  these 
cases,  the  reserve  amounts  to  only  about  10%,  we  cannot  speak 
of  convertible  bank  currency.  An  inconvertible  bank  currency 
is  scarcely  in  any  respect  superior  to  an  irredeemable  government 
currency. 

Fiat  money,  then,  is  satisfactory  only  if  the  amount  is  care- 
fully restricted.  Because  of  the  inherent  danger  of,  and  tempta- 
tion to,  inflation,  fiat  money  is  inferior  to  credit  money,  which 
under  a  good  system  possesses  the  advantage  not  only  of  an 
elasticity,  but  of  an  automatically  regulated  supply. 

The  three  kinds  of  paper  money  discussed  in  this  section 
may  also  be  classified  into  the  two  categories  of  bank  money 
and  government  money.  In  Europe  almost  the  entire  paper 
currency  was  until  the  Great  War  composed  of  the  former; 
in  the  United  States,  as  a  result  partly  of  accident,  partly  of 
the  silver  movement,  partly  of  a  certain  ungrounded  distrust 
of  the  national  banks,  and  partly  of  defective  legislation,  about 
three-fourths  of  the  paper  circulation  consisted  until  1913  of 
government  money.  Since  the  introduction  of  the  Federal 
Reserve  system,  the  proportions  tend  to  be  reversed.  On  the 
chart  opposite  page  532  will  be  found  the  details  of  the  bank  and 
total  monetary  circulation  since  1878.  The  great  advantage  of 
a  carefully  guarded  government  currency  is  absolute  security. 
The  convertibiHty  of  all  the  United  States  issues,  for  instance, 
is  now  assured  by  law,  the  act  of  igoo  imposing  on  the  Secretary 
of  the  Treasury  the  obligation  to  maintain  all  other  forms  of 
government  money  at  a  parity  with  gold,  and  assigning  for  such 
redemption  purposes,  particularly  of  the  greenbacks,  a  special 
reserve  fund  of  150  million  dollars  of  gold,  to  be  replenished  in 
case  of  need  by  the  sale  of  bonds.  On  the  other  hand,  the  dis- 
advantages of  government  paper  consists  not  only  in  the  temp- 
tation to  inflation,  but  also  in  a  certain  rigidity  or  incapacity 
to  adjust  itself  to  the  varying  needs  of  the  business  community. 
Bank  money,  on  the  other  hand,  as  we  shall  see,  may  be  made  to 
possess  all  the  safety  of  government  money  without  incurring 
any  of  its  hazards. 


CHAPTER  XXX 

CREDIT  AND  BANKING 
197.   References 

J.  S.  Mill,  Prhiciples,  bk.  iii,  chs.  xi-xiii;  W.  S.  Jevons,  Investigations 
in  Currency  and  Finance  (1884);  chs.  i,  v-viii;  H.  D.  McLeod,  The  Theory 
and  Practice  of  Banking  (15th  ed.,  1892);  C.  F.  Dunbar,  Chapters  on  the 
History  and  Theory  of  Banking  (2d  ed.,  1901),  chs.  ii  and  iv;  J.  T. 
Holdsworth,  Money  and  Banking  (2d  ed.,  1918);  J.  F.  Johnson, 
Money  and  Currency  (1905),  ch.  iii;  Horace  White,  Money  and  Banking 
(4th  ed.,  1912),  bk.  iii,  chs.  i-iii;  W.  Bagehot,  Lombard  Street  (1873); 
\V.  A.  Scott,  Money  and  Banking  (1903),  chs.  vii,  viii-xi;  Publications  of 
the  National  Monetary  Commission  (23  vols,  1901-1912);  E.  E.  Agger, 
Organized  Banking  (1918);  H.  H.  Withers,  The  Meaning  of  Money  (15 
imp.,  1917);  and  The  War  and  Lombard  Street  (3d  ed.,  191 7);  J.  P. 
Norton,  Statistical  Studies  in  the  Netv  York  Money  Market  (1902);  R.  H. 
Inglis  Palgrave,  Bank  Rate  and  the  Money  Market  in  England,  France, 
Germany,  Holland,  and  Belgium,  1844-IQOO  (1903);  G.  L.  Taylor,  The 
Credit  System  (191 4). 

198.   The  Nature  and  Forms  of  Credit 

Credit  is  an  exchange  or  transaction  which  consists  in  the 
temporary  transfer  of  the  usance  of  wealth.  The  wealth  may- 
be composed  of  concrete  goods,  a  fund  of  capital,  or  a  mere  right 
or  privilege.  In  modern  times  most  of  the  wealth  so  trans- 
ferred has  come  to  consist  of  money,  so  that  credit  nowadays 
primarily  implies  a  temporary  transfer  of  money  or  of  rights  to 
money. 

We  must  be  careful  not  to  confuse  the  legal  with  the  eco- 
nomic conception.  Legally,  if  we  part  with  the  ownership  of 
anything,  it  is  a  sale;  if  we  part  with  the  possession  while  re- 
taining the  ownership,  it  is  a  loan.  Economically,  the  essence 
of  credit  is  the  temporary  usance  of  wealth.  A  sale  on  credit 
is,  from  the  economic  point  of  view,  no  sale  at  all.     Legally, 

496 


§  198]  Nature  and  Forms  of  Credit  497 

the  ownership  is  transferred  and  the  payment  is  deferred; 
economically,  it  is  a  grant  to  the  purchaser  to  utilize  the  com- 
modity subject  to  the  prior  economic  right  of  the  seller  to  have 
a  certain  sum  of  money  returned  to  him.  The  economic  aliena- 
tion does  not  become  complete  until  the  payment  of  the  money 
is  effected,  that  is,  until  the  credit  expires. 

From  this  fundamental  fact  flow  three  consequences:  (i) 
Since  the  transfer  is  temporary,  it  must  terminate  at  a  future 
date.  The  loan  must  be  repaid,  and  if  in  the  meantime  the 
subject  of  the  loan  has  disappeared,  its  economic  equivalent 
must  be  returned.  (2)  Whenever  commodities  are  loaned  and 
payment  is  deferred  until  the  expiration  of  a  certain  period, 
there  is,  strictly  speaking,  a  case  of  credit.  In  the  overwhelm- 
ing mass  of  modern  business  transactions,  however,  what  is 
loaned  is  not  a  commodity,  but  a  sum  of  money.  Credit  thus 
virtually  becomes  a  contract  for  the  future  delivery  of  money, 
or  a  "short  sale"  of  money,  and  credit  is  thus  best  discussed  in 
connection  with  money.  (3)  The  lender  must  trust  the  ability 
of  the  borrower  to  meet  his  obligation  at  the  stipulated  date. 
All  credit  rests  on  confidence,  —  a  confidence  which  runs  through 

i  the  whole  gamut  of  risk. 

The  essence  of  credit,  then,  is  the  right  of  enjoying  some- 
thing, in  most  cases  money,  the  ultimate  economic  title  to 
which  belongs  to  another.  According  to  the  use  made  of  the 
enjoyment  we  distinguish  between  production  and  consumption 
credit.  If  we  borrow  money  from  a  friend  or  pawn  a  watch  in 
order  to  buy  a  meal,  the  credit  is  for  purposes  of  consumption. 
If  we  borrow  funds  to  increase  our  business,  the  credit  is  for 
purposes  of  production.  With  the  advent  of  modern  economic 
conditions,  credit  has  become  to  an  overwhelming  degree  pro- 

"  ductive  credit.  This  explains  its  advantages  and  its  dangers 
alike.  If  the  goods,  capital,  or  privileges  are  so  utilized  by  the 
borrower  as  to  yield  a  surplus  over  and  above  that  part  of  the 
produce  requisite  to  pay  for  the  use  of  the  loan,  credit  performs 
the  function  of  capital  and  may  be  deemed  equivalent  to  an 
32 


498  Credit  and  Banking  [§  k; 

increase  of  capital.  In  that  sense  credit  might  be  called  au;- 
iliary  capital.  By  this  is  not  meant  that  credit  is  actualb 
capital,  for  if  the  capital  is  in  the  hands  of  the  borrower,  it  i- 
withdrawn  from  those  of  the  lender.  In  the  hands  of  the  bor- 
rower, however,  the  capital  does  more  good  than  in  those  of 
the  lender,  for  otherwise  it  would  not  be  transferred.  To  the 
extent  that  credit  puts  capital  where  it  is  more  productive 
than  it  would  otherwise  be,  it  is  equivalent  to  an  increase,  or 
at  all  events  to  an  increased  usefulness,  of  capital. 

On  the  other  hand,  if  the  funds  secured  through  credit  arc 
unwisely  utilized  or  dissipated,  they  diminish  the  productive 
forces  of  the  community,  because  the  debtor  not  only  wastes 
his  own  efforts,  but  is  unable  to  replace  the  borrowed  capital. 
Owing  to  the  facility  with  which  modern  credit  can  be  obtained, 
it  is  peculiarly  susceptible  of  abuse.  If  a  man  has  to  create  or 
to  accumulate  capital,  he  will  be  moderately  careful  in  its 
employment;  if  he  secures  it  on  credit,  he  is  more  apt  to  take 
chances.  He  is  relieved  from  immediate  cares,  and  is  likely 
to  paint  the  future  in  roseate  hues.  Inasmuch  as  credit  rests 
on  confidence,  it  is  human  nature,  in  dealing  with  the  property 
of  another,  to  have  a  misplaced  confidence  in  one's  self. 

Credit,  like  capital,  is  either  commercial,  industrial,  agricul- 
tural, or  financial.  In  the  broader  sense  all  credit  is  financial, 
because  money  or  money's  worth  must  be  repaid.  But  the 
classification  is  none  the  less  useful  from  the  point  of  view  of 
the  credit  instrument. 

Commercial  credit  takes  the  form,  apart  from  the  ordinary 
book  accounts  and  due  bills,  of  promissory  notes  and  drafts  or 
bills  of  exchange.  A  promissory  note  is  a  written  promise  to 
pay  a  certain  sum  to  the  person  designated  as  payee,  either 
on  demand  or  at  the  expiration  of  a  definite  period.  It  can 
be  indorsed  by  the  payee,  and  is  then  further  negotiable,  the 
indorser  making  himself  responsible  (unless  he  adds  the  words 

without  recourse")  in  case  the  note  is  not  honored  at  maturity 
by  the  original   maker.     If   there  is  one  indorsement   on   the 


§  198]         Nature  and  Forms  of  Credit  499 

mote,  it  is  called  double-name  paper,  because  both  maker  and 
indorser  are  responsible.  If  there  are  two  indorsers,  it  is  called 
three-name  paper. 

A  draft  or  bill  of  exchange  is  a  written  order  addressed  by  the 
seller  of  merchandise  to  the  purchaser,  requesting  the  payment 
of  a  definite  sum.  If  payable  on  demand,  it  is  called  a  sight 
bill;  if  at  the  expiration  of  a  fixed  period,  a  time-bill,  which  is 
itself  either  a  short  or  a  long  bill,  according  to  the  period  for 
which  it  runs.  The  seller  of  the  goods  is  said  to  draw  upon 
the  purchaser,  and  is  hence  called  the  drawer  of  the  bill.  A 
time-bill  is  at  once  presented  to  the  "drawee,"  who  by  writing 
his  name  below  the  word  "accepted"  is  said  to  "accept"  it, 
thus  virtually  converting  the  bill  into  his  own  promissory  note. 
By  negotiating  the  bill,  the  seller  of  the  goods  can  hence  secure 
immediate  payment,  less  the  commission  or  discount.  If  both 
drawer  and  drawee  live  in  the  same  country,  the  bill  of  exchange 
is  termed  a  domestic  bill  or  in  America  a  draft;  if  they  live  in 
different  countries,  it  is  a  foreign  bill.  Oftentimes  it  is  sought  to 
add  to  the  personal  security  of  the  note  or  bill.  In  the  case  of 
promissory  notes,  the  collateral  securities  pledged  are  generally 
stocks,  bonds,  and  mortgages,  and  the  note  is  then  called  a 
collateral  note.  Drafts  or  bills,  on  the  other  hand,  are  fre- 
quently accompanied  by  certificates  testifying  to  the  possession 
of  commodities,  like  bills  of  lading,  dock  warrants,  and  ware- 
house and  elevator  receipts.  In  the  case  of  a  bill  of  lading  it 
is  customary  to  attach  the  invoice  and  the  insurance  policy. 
Such  bills  are  usually  called  "documented"  bills.  Of  this  char- 
acter also  are  the  grain  or  cotton  notes  and  the  cattle  paper  in 
the  South  and  West.  In  the  case  of  a  future,  instead  of  a  past, 
transaction,  the  notes  and  bills  are  called  accommodation 
paper.  An  intending  purchaser  "accommodates"  the  future 
seller  by  giving  his  note  at  the  beginning,  instead  of  at  the 
conclusion,  of  the  transaction.  Accommodation  paper,  however, 
is  often  issued  without  any  intention  of  a  real  transfer  of  goods, 
and  thus  affords  ample  opportunity  for  speculation. 


500  Credit  and  Banking  [§  198 

As  opposed  to  these  promissory  notes,  drafts,  and  bills,  which 
constitute  the  usual  "commercial  paper,"  industrial  credit  in- 
struments comprise  documents  or  securities  connected  with 
corporate  industry  like  certificates  of  stock,  and  bonds  which 
represent  contingent  rather  than  actual  ownership.  The  prin- 
cipal forms  of  these  have  been  described  in  §  141.  Agricul- 
tural credit  instruments  assume  the  form  of  notes  accompanied 
by  mortgages  on  the  land,  the  farm  implements,  or  the  crops. 

Financial  credit  in  the  narrower  sense  is  primarily  bank  credit, 
the  instruments  for  transferring  the  funds  being  chiefly  checks, 
drafts,  and  letters  of  credit.  A  check  is  a  written  order  from  a 
depositor  in  a  bank  directing  it  to  pay  a  certain  sum  of  money 
to  the  person  designated,  who  may  then  by  indorsement  nego- 
tiate the  check  further.  A  check  may  be  certified  by  the  cashier 
stamping  that  word  across  its  face  and  adding  his  name  at  the 
bottom,  in  which  case  the  depositor's  account  is  at  once  debited 
with  the  amount,  the  certified  check  becoming  the  bank's 
promise  to  pay  rather  than  an  order  on  the  bank  to  pay.  A 
cashier's  check  is  an  order  on  a  bank  signed  by  the  cashier  and, 
like  the  certified  check,  is  really  a  promise  to  pay  on  the  part 
of  the  bank.  An  ordinary  check,  although  technically  only 
an  order  on  the  bank,  has  become  legally  an  implied  promise 
to  pay  on  the  part  of  the  maker  or  drawer  of  the  check.  A 
bank  draft  is  a  written  order  addressed  by  one  bank  to  another 
directing  the  payment  of  a  certain  sum  to  a  third  party.  The 
first  bank  is  said  to  draw  upon  the  second,  where  it  keeps  a  de- 
posit or  has  funds  to  its  credit.  If,  however,  the  first  bank 
does  not  desire  to  do  this,  and  if  its  customer  wishes  to  remit 
money,  the  bank  gives  him,  in  exchange  for  his  own  check, 
what  is  known  as  a  bank  certificate,  or  certificate  of  deposit, 
payable  to  the  order  of  a  certain  payee.  Finally,  a  letter  of 
credit  is  a  document  issued  by  a  bank  (or  banker)  directed  to 
its  correspondents  abroad,  authorizing  the  holder  to  draw  upon 
the  issuer  or  some  central  agent,  up  to  a  certain  amount  and 
within  a  certain  period  like  one  or  two  years.     As  the  holder 


§199]  Development  of  Banking  501 

usually  draws  the  sums  by  instalments  through  the  medium  of 
a  draft  or  bill  of  exchange,  the  amounts  so  drawn  are  noted  on 
the  letter,  showing  at  a  glance  how  much  of  the  credit  remains 
unexhausted. 

Commercial,  industrial,  and  agricultural  credit  all  finally 
converge  in  the  bank,  which  is  the  lender  par  excellence.  Since 
modern  credit  operations  centre  in  the  bank,  the  study  of  credit 
is  in  large  measure  the  study  of  banking. 

199.   The  Development  of  Banking 

The  word  "bank"  was  formerly  supposed  to  be  derived  from 
the  banc  or  bench  on  which  the  early  money-changers  kept 
their  coins,  so  that  the  banker  would  be  the  "bencher,"  as  the 
money-changers  were  called  in  Greece  (rpaxaftrat)  and  Rome 
(mensarii).  The  more  approved  modern  derivation,  however, 
is  from  "bank"  in  the  sense  of  a  heap  or  pile,  as  in  sand-bank 
or  mud-bank.  Banco  in  mediaeval  Italy  was  accordingly  used 
to  signify  a  mass  or  fund  of  capital,  and  the  early  colonial  "  banks 
of  money"  in  America  denoted  batches  or  issues  of  paper  money. 
Originally  designating  a  fund  of  capital,  a  bank  has  to-day 
come  to  mean  the  institution  dealing  in  such  funds.  As  the 
result  of  a  long  evolution  the  modern  bank  conducts  three  kinds 
of  business,  —  money  dealings,  credit  transactions,  and  promot- 
ing or  syndicate  operations. 

Dealings  in  actual  money  were  the  most  primitive  occupa- 
tion of  the  bankers.  The  early  money-changers  made  it  a 
business  to  exchange  one  form  of  coin  for  another,  domestic 
or  foreign.  A  large  part  of  this  business  is  still  done  by  pri- 
vate bankers  and  money-brokers,  although  most  large  banks 
with  international  relations  exchange  foreign  money,  and  all 
banks  stand  ready  to  exchange  one  kind  of  domestic  money 
for  another.  Many  banks  also,  when  occasion  demands,  make 
actual  shipments  of  money  from  place  to  place  and  conduct 
arbitrage  operations  in  silver,  i.  e.,  take  advantage  of  the  mo- 
mentary  discrepancies    in    the   price    fluctuations    in    different 


502  Credit  and  Banking  [§  199 

countries  by  purchasing  in  the  cheaper,  and  simultaneously 
selling  in  the  dearer,  market. 

Far  more  important  and  distinctive,  however,  are  the  credit 
operations.  These  take  the  five  forms  of  remittances,  deposits, 
advances,  discounts  and  note-issues. 

(i)  Historically  it  was  an  easy  transition  for  the  money- 
changers, instead  of  returning  to  the  individual  himself  an 
equivalent  for  the  sum  received,  to  remit,  i.  e.  pay  by  remittance, 
a  corresponding  amount  to  some  one  in  another  place.  To 
accomplish  this,  it  became  necessary  to  have  in  these  other 
places  agencies  or  correspondents  on  whom  orders  to  pay  could 
be  drawn.  The  early  bills  of  exchange  were  thus  primarily 
foreign  bills.  At  first  they  were  not  negotiable.  Gradually, 
however,  the  custom  arose  of  transferring  them  by  indorsement 
and  delivery,  and  there  grew  up  a  legal  system  based  on  busi- 
ness usages  as  to  conditions  of  negotiation,  presentation  for 
acceptance,  payment  after  certain  days  of  grace,  and  protest 
in  case  of  dishonor.  Remittances  are  now  also  made  by  means 
of  telegraphic  and  cable  transfers,  express  orders,  and  govern- 
ment postal  notes  or  money  orders. 

(2)  When  people  found  that  they  could  pay  their  debts 
elsewhere  through  the  money-changers,  it  was  again  a  short 
step  to  intrust  to  them  sums  for  safe-keeping.  Thus  arose  the 
custom  of  making  deposits  of  money  and  bullion.  In  the 
mediaeval  Italian  towns  the  campsores,  or  money-changers  and 
dealers  in  foreign  exchange,  came  at  the  close  of  the  thirteenth 
century  to  be  called  bancherii,  or  bankers,  from  the  capital  sum 
or  "bank"  in  their  possession.  In  London,  somewhat  later, 
it  was  the  goldsmiths  who  performed  the  same  function.  In 
the  course  of  time  serious  abuses  arose  in  connection  with  the 
custody  of  the  deposits  intrusted  to  the  private  bankers,  and 
finally  by  the  act  of  1584  Venice  instituted  the  public  Banco 
di  Rialto  or  della  Piazza,  the  first  bank  of  modern  times. ^    In 

1  The  bank  of  St.  George  at  Genoa  in  the  fifteenth  century,  which  is 
sometimes  spoken  of  as  the  first  bank,  was  indeed  the  first  modern  cor- 


^  iqq]  Development  of  Banking  503 

[619  it  was  supplemented  by,  and  in  1637  merged  into,  the 
Banco  del  Giro,  or  transfer  bank,  so  called  because  the  depositors 
:ould  not  only  remove  their  deposits  on  demand  but  transfer 
:hem  to  the  credit  of  some  other  depositor.  The  transfer 
:ould,  however,  be  made  only  by  word  of  mouth  and  in  the 
oresence  of  both  parties.  When  similar  causes,  as  well  as  the 
desire  to  secure  a  standard  free  from  the  fluctuations  of  the 
depreciated  coins  in  actual  circulation,  led  to  the  establish- 
ment of  the  government  Wissclbank  (exchange  bank)  in  Amster- 
dam in  1609,  merchants  were  compelled  to  keep  their  accounts 
in  these  assignable  deposits  known  as  bank  money,  for  which 
the  town  was  now  responsible,  and  it  became  customary  to  make 
the  transfers  by  a  written  order.  This  order,  however,  had  at 
first  to  be  presented  in  person  by  the  payer,  and  became  assign- 
able to  the  payee,  who  had  also  to  be  a  customer  of  the  bank, 
anly  the  day  after.  When  the  giro  banks  at  Hamburg  and 
Nuremberg  were  founded  in  1619  and  162 1,  these  written 
orders  gradually  acquired  more  of  the  characteristics  of  the 
modern  check,  and  came  into  general  use.  We  even  hear  of 
such  a  giro  bank  in  Liibeck  in  the  fifteenth  century. 

The  early  banks  were  thus  institutions  receiving  cash  de- 
posits, dealing  in  bills  of  exchange,  and  making  transfers  from 
one  depositor  to  another.  During  the  nineteenth  century, 
[however,  there  developed  a  special  form  of  bank  designed  for 
jthe  sole  purpose  of  securely  preserving  cash  deposits.  These 
are  known  as  Savings  Banks  ^  which,  in  contradistinction  to 
most  commercial  banks,  pay  interest  on  deposits,  do  not  treat 
them  as  assignable  by  transfer,  and  are  permitted  to  invest 
their  funds  only  in  specified  securities.  While  the  savings 
banks  are  intended  primarily  for  small  deposits,  there  have 
poration,  its  stockholders,  to  whom  was  intrusted  the  administration  of 
certain  mortgaged  municipal  revenues,  being  the  subscribers  to  the 
government  forced  loan.  It  was  called  a  bank  because  of  this  fund  of 
capital  {banco  or  monk).  But  it  did  not  carry  on  the  banking  busi- 
ness referred  to  above. 

^  Date  of  origin :  Germany,  1765;  England,  1797;  United  States,  1816. 


504  Credit  and  Banking  [§  191 

arisen  still  more  recently  the  Trust  Companies,  to  which  large  |;;re; 
sums  may  be  intrusted.  These,  however,  as  opposed  to  saving 
banks,  often  carry  on  what  amounts  virtually  to  a  general  bank 
ing  business.  Finally,  many  banks  receive  deposits  of  securitiei 
and  silverware  to  be  kept  in  their  vaults,  acting,  however,  ii 
this  respect  like  storage  warehouses  or  safe-deposit  companies. 

(3)  As  the  private  bankers  accumulated  large  deposits,  ii 
was  natural  that  they  should  begin  to  compete  with  the  money- 
lenders, especially  as  the  latter  owned  their  own  capital,  while 
the  bankers  were  able  to  lend  the  capital  deposited  with  therr 
by  others.  When  the  deposit  banks,  however,  were  first  formed 
the  safe-keeping  of  the  deposits  was  deemed  incompatible  with 
their  loan  to  others.  In  the  bank  of  Amsterdam,  for  instance, 
it  was  not  until  1656,  and  more  definitely  in  1683,  that  the 
bank  began  to  make  advances  upon  deposits  of  coin.  The 
advances  took  the  form  of  the  granting  of  a  credit  of  so  much 
bank  money  on  the  books  of  the  bank,  the  depositor  being 
given  a  receipt  entitling  him  to  withdraw  it  within  a  specified 
time  upon  returning  the  bank  money.  Gradually  other  com- 
modities besides  coin  and  bullion  were  received  in  exchange  for 
advances.  From  the  fact  that  this  developed  at  first  in  the 
Italian  towns,  it  came  to  be  known  as  the  Lombard  business, 
a  term  still  employed  in  Germany  to-day.  Because  of  the 
fact  that  ordinary  commodities  are  not  always  immediately 
salable,  and  because  it  becomes  embarrassing  for  the  banks  to 
turn  themselves  into  storage  warehouses,  the  character  of  these h 
advances  has  been  much  restricted,  and  the  modern  commercial 
bank  limits  itself  to  a  large  extent  to  making  loans  either  on 
strictly  commercial  paper  or  on  collaterals  which  are  immedi- 
ately convertible  into  cash.  Special  institutions  have  accord 
ingly  sprung  up  in  modern  times,  designed  to  supply  the  need 
of  advances  on  these  particular  forms  of  property,  and  on  the 
less  easily  realizable  securities  like  land.  Such,  for  instance, 
are  the  Agricultural  and  Mortgage  banks  abroad,  and  the  Bond 
and    Mortgage    companies,   Mortgage   Guarantee    companies,  L 


1101 


En 


igg]  Development  of  Banking  505 

'!)redit  companies,  and  Loan  and  Investment  companies  in  the 
S^Jnited  States.  The  Federal  Reserve  act  of  1913,  however, 
'  las  permitted  the  national  banks  not  in  a  central  reserve  city 

o  loan  on  farm  lands  under  careful  restrictions. 

(4)  Having  once  begun  to  make  advances  on  coin  or  com- 
nodities,  it  was  again  but  a  short  step  for  the  private  bankers 
o  make  loans  on  more  intangible  security,  that  is,  to  open  an 
ccount  for  him,  either  on  his  written  promise  to  pay,  or  in 
ome  one  else's  order  to  pay.  Since  the  promise  fell  due  in  the 
iuture  and  the  banker  advanced  the  cash  or  opened  the  account 

t  once,  he  deducted  a  certain  amount  from  the  face  of  the  note 
iir  order  as  a  discount;  and  the  operation  as  well  as  the  paper  it- 
elf  came  to  be  called  a  discount.  The  development  was  grad- 
lal,  until  in  modern  times  discounting  has  almost  everywhere 
lecome  an  important  function  of  the  commercial  bank. 

(5)  In  the  meantime  the  banker  had  learned  that  in  lieu  of 
xtending  his  credit  to  the  customer  by  opening  an  account, 
le  might  issue  his  own  promise  to  pay,  in  the  shape  of  a  banker's 
tote.  Such,  for  instance,  were  the  goldsmiths'  notes  in  Eng- 
and.  The  acceptability  of  these  notes  as  a  medium  of  exchange 
lepended  largely  on  the  reputation  of  the  individual  banker, 
,nd  the  institution  of  banking  corporations  with  these  powers 
vas  designed  to  increase  their  safety.  The  first  bank  of  issue 
vas  the  Bank  of  Sweden,  founded  originally  as  a  private  institu- 
lion  in  1656,  but  converted  into  a  government  bank  in  166S. 
The  earliest  important  private  banks  of  issue  were  the  Bank  of 
England,  founded  in  1694,  and  the  Bank  of  Scotland  in  1695. 
These  differed  from  the  older  deposit  banks  not  only  in  that 
hey  were  banks  of  issue,  but  also  in  that  they  were  invested 
vith  a  corporate  form.  With  them  modern  banking  may  be 
aid  to  begin.  Historically,  in  fact,  the  business  of  issue  pre- 
eded  that  of  discount.  Banks  were  noW  formed  to  issue  notes 
o  serve  as  currency,  and  the  discounting  of  commercial  paper 
;rew  up  only  very  gradually.  But  the  discount  business  slowly 
vershadowed  the  other,  until  at  the  present  time,  especially  in 


506  Credit  and  Banking  [§  200 

Anglo-Saxon    countries,    the    note-issue    function    has    become 
subsidiary. 

Finally,  banks  have  added  to  these  money  and  credit  deal- 
ings all  kinds  of  transactions  in  public  and  private  securities. 
Sometimes  they  act  as  agents  for  governments  and  for  private 
corporations  in  cashing  coupons  and  dividends;  sometimes 
they  carry  on  independent  dealings  in  the  arbitrage  of  securities; 
sometimes  they  participate  in  the  new  issues  of  government 
bonds  and  of  industrial  securities  through  promoting  syndicates. 
Here,  however,  a  distinction  must  be  drawn  between  the  English 
and  American  banks  on  the  one  hand,  and  those  of  the  European 
continent  on  the  other.  In  the  former  countries,  where  the 
deposits  are  of  vastly  greater  extent  than  in  the  latter,  it  is  not 
considered  prudent  to  jeopardize  the  liquid  assets  by  such 
industrial  investments,  and  in  the  United  States  iu  especial  it 
is  the  Trust  Companies  rather  than  the  banks  which  aid  the- 
private  bankers  in  financing  the  industrial  syndicates. 

200.   Modern  Bank  Operations 

Of  all  these  various  classes  of  business  the  credit  transac- 
tions have  become  the  most  important  and  the  most  distinc- 
tive. The  chief  function  of  a  modern  bank  may  thus  be 
declared  to  be  that  of  dealing  in  credit  or  of  rendering  credit 
mobile.  This  is  now  accomplished  primarily  by  the  three  opera-i 
tions  of  discount,  deposit,  and  issue. 

(i)  A  business  man  finds  that  in  order  to  meet  some  past 
or  future  obligation  he  needs  funds.  If  he  has  sold  goods  on 
credit,  he  usually  receives  a  promissory  note  on  which  the 
bank  will  give  him  a  sum  equal  to  the  par  value  of  the  note  less 
the  interest  during  the  time  that  the  note  has  to  run.  This 
deduction  involves  a  discount,  and  to  discount  a  note  thus 
means  to  pay  its  face  value  less  the  interest  still  to  accrue, 
Legally,  the  transaction  is  a  sale  or  exchange  of  rights:  the 
bank  buys  the  note  or  the  right  to  demand  payment  from  the 
maker,  and  sells  to  the  merchant  the  right  to  demand  payment 


§  2oo]  Modern  Bank  Operations  507 

from  it.  Economically,  the  transaction  is  a  loan,  because  the 
bank  virtually  lends  to  the  merchant  the  use  of  the  capital  repre- 
sented by  the  note  (less  the  discount).  The  bank  thus  lends 
its  own  credit  in  the  form  of  a  contract  for  the  future  delivery  of 
money.  It  is  for  this  reason  that  bank  credit  is  sometimes 
spoken  of  as  a  "short  sale"  of  money. 

The  borrower,  in  lieu  of  presenting  some  other  man's  promis- 
sory note  for  discount,  may  offer  his  own,  either  in  person  or,  as 
is  customary  in  England  and  America,  through  the  bill-broker 
or  note-broker.  He  may  also  offer  some  other  form  of  commer- 
cial paper  mentioned  in  §  198.  The  bills  receivable,  or  the 
paper  thus  acquired  by  the  bank  are  called  discounted  bills,  or 
in  America  simply  discounts.  They  really  become  part  of  the 
investments  or  securities  of  the  bank,  and  in  England  they  are 
classed  under  the  head  of  the  private  securities.  Frequently 
the  borrower  will  desire  to  borrow  on  collaterals  —  that  is,  on 
securities,  like  government  bonds  and  corporate  stock  or  bonds. 
The  loans  made  in  this  way  are  usually  called  advances  in  Eng- 
land, and  classed  as  such  under  either  the  public  or  the  private 
securities  held  by  the  bank.  In  the  United  States  they  are 
included  with  the  others  under  the  single  category  of  "loans 
and  discounts;"  properly,  so,  because  the  principal  evidence  of 
debt  which  together  with  the  collateral  is  put  into  the  "loan 
envelope"  is,  in  the  case  of  time  loans,  usually  a  promissory 
note  or,  in  the  case  of  call  loans,  a  "stock  note"  which  em- 
powers the  lender  to  close  out  the  collateral  in  case  of  default. 
Loans  and  discounts,  or,  as  they  are  called  in  England,  bills  dis- 
counted and  temporary  advances,  thus  form  a  part  of  its  assets, 
because  they  represent  sums  due  to  the  bank  by  the  borrowers 
or  their  assignees. 

(2)  The  question  now  arises  as  to  the  shape  in  which  the 
bank  lends  its  credit.  When  a  bank  discounts  commercial 
paper,  it  may,  instead  of  paying  actual  money,  place  on  its  books 
an  equivalent  sum  to  his  credit.  In  other  words,  it  may  open 
in  his  name  an  account,  which  can  be  drawn  out  on  demand 


508  Credit  and  Banking  [§  200 

by  check.  This  deposit,  thus  becomes  a  liability  of  the  bank: 
the  bank  owes  the  amount  to  the  depositor.  Deposits  and 
discounts  hence  figure  on  opposite  sides  of  the  bank's  balance 
sheet.  The  deposits  represent  bank  liabilities;  the  loans  and 
discounts  represent  bank  assets. 

A  deposit  may  also  arise  without  any  discount,  as  when  one 
hands  to  the  bank  a  sum  of  money  or  a  credit  instrument  like 
a  check  which  is  immediately  payable  and  collectible  without 
any  discount.  In  every  case,  however,  the  deposit  gives  the 
depositor  a  right  to  draw  on  the  bank  to  the  extent  of  the  de- 
posit. Legally,  a  deposit  is,  therefore,  a  sale  of  money  or 
money's  worth  in  exchange  for  a  right  to  demand  a  correspond- 
ing sum  at  any  time  in  the  future.  The  deposit  may  be  one  of 
money  or  of  bank  credit.  In  former  times,  as  we  have  learned, 
the  banks  dealt  only  in  cash  deposits;  nowadays  they  deal  pri- 
marily in  credit  deposits.  A  properly  managed  bank  will 
always  endeavor  to  keep  the  discount  elements  in  the  deposits 
of  such  a  high  character  that  they  are  virtually  as  good  as 
cash,  i.  e.  speedily  convertible  into  cash. 

An  interesting  form  of  deposit  is  found  in  Scotland  under 
the  name  of  "cash  credit."  This  consists  of  an  open  credit 
or  drawing  account  granted  by  the  bank  to  some  one  vouched 
for  by  at  least  two  "cautioners"  or  sureties.  These  credits 
are  generally  given  in  sums  of  from  £ioo  to  £500,  and  the  cus- 
tomer is  expected  to  draw  on  the  bank  only  in  instalments, 
interest  being  charged  on  the  amounts  actually  drawn.  A 
cash  credit,  which  is  thus  a  right  to  overdraw  an  account  up 
to  a  certain  point,  is  more  economical  than  an  ordinary  loan, 
and  is  peculiarly  fitted  for  frugal  but  enterprising  small  mer- 
chants, and  for  a  country  where  large  operations  in  ordinary 
commercial  paper  are  infrequent. 

(3)  Sometimes  the  borrower  who  presents  the  note  for  dis- 
count elects  to  receive  money.  In  place  of  giving  coin  or  govern- 
ment paper,  the  bank  may  prefer  to  issue  its  own  promissory 
notes.     So  far  as  the  bank  and  the  borrowers  are  concerned,  the 


§  2oo]  Modern  Bank  Operations  509 

economic  essence  of  the  bank  note  is  identical  with  that  of  de- 
posits. Both  are  bank  liabilities,  because  the  bank  must  ulti- 
mately pay  its  note  or  honor  a  requisition  on  the  deposit;  both 
involve  the  granting  of  credit  to  the  borrower,  who  acquires  the 
right  to  demand  payment  of  a  given  sum  from  the  bank.  The 
function  of  issue  differs  in  form,  but  not  in  substance,  from  that 
of  deposit.  So  far  as  the  borrowers  are  concerned,  it  often  makes 
little  difference  to  them  whether  they  secure  the  means  of  pay- 
ment through  actual  money  or  through  the  possibility  of  draw- 
ing checks  or  drafts  on  the  bank.  It  is  for  this  reason  that 
checks  and  drafts  are  sometimes  spoken  of  as  deposit  currency 
in  contrast  to  the  note  currency.  They  differ  from  bank  notes 
in  that  they  are  not  usually  made  out  for  even  sums,  and  that 
they  cannot  be  transferred  without  indorsement.  To  this  ex- 
tent they  form  credit  of  limited,  rather  than  of  general,  accept- 
ability and  are  not  available  for  "change"  or  till  money.  But 
for  all  the  larger  payments  which  ordinary  merchants  have  to 
make,  the  credit  in  the  form  of  a  deposit  is  equally  as  good  as 
the  credit  in  the  form  of  a  bank  note.  Moreover,  since  bank 
notes  are  credits  to  the  borrowers,  they  are  liabilities  of  the 
bank.  Bank  notes,  like  deposits,  are  liabilities  of  the  bank  in 
contrast  to  loans  and  discounts,  which  are  assets. 

These  three  operations  of  discount,  deposit,  and  issue  com- 
prise virtually  the  whole  of  modern  credit  transactions.  For  of 
the  two  other  categories  of  credit  operations  referred  to  in  the 
last  section,  namely  advances  and  remittances,  the  former  are 
now  really  only  a  species  of  discount,  and  the  latter  are 
accomplished  by  means  of  a  combination  of  discount  and 
deposit. 

The  most  significant  fact  in  the  evolution  of  credit  is  the 
growth  of  modern  deposit  banking.  In  the  early  banks,  like 
those  of  Venice  or  Amsterdam,  the  deposits,  which  were  in 
cash  and  insignificant  at  best  in  comparison  with  the  total 
exchanges,  were  designed  primarily  to  serve  as  a  medium  of 
transfer  between  the  actual  depositors.     In  modern  times  de- 


5IO  Credit  and  Banking  [§200 

posits  are  not  alone  chiclly  credit  deposits  arising  from  dis 
counts,  but  perform,  through  the  means  of  checks  and  deposits, 
a  most  important  service  as  substitutes  for  money.  The  use 
of  modern  deposits  with  the  check  system  is  everywhere,  as 
we  have  seen,  subsequent  to  that  of  bank  notes.  In  unde- 
veloped communities,  where  ordinary  business  transactions  are 
largely  of  a  retail  character,  the  most  obvious  business  of  the 
bank,  as  well  as  its  chief  source  of  profit,  is  to  issue  to  the  public 
its  own  promises  to  pay  in  the  form  of  bank  notes.  It  is  only 
as  the  transactions  grow  in  magnitude  that  commercial  paper 
is  offered  for  discount,  and  it  is  only  as  the  confidence  in  the 
bank  increases  that  deposits  develop  on  a  large  scale. 

It  is  accordingly  only  in  the  most  advanced  commercial 
nations,  like  England  and  the  United  States,  that  deposits  play 
such  a  great  role.  In  the  first  half  of  the  nineteenth  century, 
when  the  deposits  in  the  American  and  English  banks  were 
small,  the  banking  problem  was  wellnigh  exclusively  that  of 
note  issue.  At  the  present  time  in  the  United  States  there  are 
many  banks  which  do  not  take  advantage  of  their  privilege  of 
note  issue.  On  the  other  hand,  on  the  European  continent, 
deposits  are  still  relatively  insignificant. 

The  widespread  employment  of  checks  has  led  to  special 
arrangements  for  liquidating  the  mutual  liabilities  of  the  banks 
through  the  device  of  clearing  houses.  To  obviate  the  necessity 
of  repeated  payments  to-and-fro,  the  banks  devised  an  institu- 
tion in  which  the  reciprocal  claims  are  adjusted  or  "cleared" 
by  being  set  off  against  one  another,  with  a  payment  of  the 
uncancelled  balances  only.  Even  these  payments,  moreover, 
are  frequently  made,  not  in  cash  but,  as  in  New  York,  in  clear- 
ing-house certificates,  which  represent  deposits  of  gold.  The 
clearing-house  coin  certificates  (not  to  be  confused  with  the 
clearing-house  loan  certificates  described  in  the  next  section) 
are  used  only  for  this  purpose,  and  may  be  counted  as  part  of 
the  bank's  lawful  reserve.  The  London  clearing  house  dates 
from  1775,  that  of  New  York  from  1854.     In  1913  the  volume 


§  2oi]  Bank  Reserves  51  r 

(jf  exchanges  in  the  162  clearing  Iiouses  of  the  United  Slates 
amounted  to  over  173  billions  of  which  nearly  sixty  per  cent 
was  recorded  in  the  New  York  clearing  house  alone.  Bank 
clearings  are  now  also  effected  within  the  Federal  Reserve  system 
through  the  Gold  Settlement  fund  and  the  Federal  Reserve 
Agents  fund.  In  1918  the  combined  clearings  and  transfers 
amounted  to  over  a  billion  a  week,  involving  a  change  of  as  little 
as  I  %  in  the  ownership  of  the  gold  in  the  fund.  On  the  European 
continent  the  clearing  houses  are  both  more  recent  and  less  im- 
portant, partly  because  of  the  central  bank,  partly  because  of 
the  smaller  use  of  checks. 

201.   Bank  Reserves 

The  chief  danger  to  a  bank's  solvency  arises  from  the  ina- 
bility to  meet  demand  obligations.  The  bank  must  therefore 
keep  in  reserve  in  cash,  or  what  is  actually  equivalent  to  cash,  a 
sum  sufficient  to  pay  all  probable  demands  for  cash.  This  is 
called  the  reserve,  and  this  reserve  was  the  original  "bank" 
or  pile  on  which  the  mediaeval  banks  did  business.  It  must 
not  be  confused  either  with  the  so-called  "reserve"  of  the 
continental  banks  in  Europe,  which  is  equivalent  to  what  we 
term  the  "surplus,"  or  with  the  "reserve-capital,"  which  in 
England  is  often  used  to  designate  the  unpaid  capital  that  must 
be  supplied  in  certain  emergencies  by  the  shareholders  of  the 
English  joint-stock  banks. 

The  problem  of  the  reserve  may  conveniently  be  discussed 
under  the  four  heads  of  the  character,  the  composition,  the 
amount,  and  the  protection  of  the  reserve. 

(i)  Since  the  demand  liabilities  are  composed  of  bank  notes 
and  deposits,  the  character  of  the  reserves  will  vary  with  the  dif- 
ferent proportion  of  these  elements  to  each  other.  On  the 
European  continent  the  reserve  is  held  primarily  against  the 
issues;  in  England  and  America,  where  the  deposits  far  out- 
weigh the  issues,  the  question  is  chiefly  one  of  reserve  against 


1^12  Credit  and  Hanking  [§201 

deposits.  Wc  shall  accordingly  treat  in,  tiiis  section  primarily 
of  the  reserve  against  deposits,  leaving  the  question  of  reserve 
against  note  issues  for  the  next  chapter. 

In  the  European  countries,  where  central  banks  exist,  it  is 
customary  for  the  smaller  banks  to  keep  their  reserves  as  bal- 
ances in  the  larger  institutions,  or  even  to  depend  for  a  reserve 
chiefly  on  the  central  bank.  Thus  the  reserve  of  the  Bank  of 
England  is  to  a  very  great  extent  the  real  reserve  for  the  entire 
country,  a  fact  that,  as  Bagehot  has  pointed  out,  places  on  it  a 
most  serious  responsibility.  Opposed  to  this  system  of  a  single 
reserve  is  that  of  the  multiple  reserve,  until  recently  the  Ameri- 
can system,  where  each  bank  is  supposed  to  keep  its  own 
reserve.  In  times  of  crisis,  therefore,  when  the  stability  of  the 
entire  structure  of  credit  was  imperilled  by  the  imprudence  of 
a  single  bank,  resort  was  taken  to  the  expedient  of  combined  re- 
serves. In  virtue  of  this  system,  first  tried  in  New  York  in  i860, 
under  the  stress  of  the  impending  Civil  War,  a  loan  commit- 
tee of  the  clearing  house  was  empowered  to  issue  to  any  bank, 
on  pledge  of  securities,  certificates  of  deposit  known  as  clearing- 
house loan  certificates  which  enabled  the  weaker  banks  to  expand 
their  loans  and  which  were  accepted  by  the  others  in  lieu  of 
cash.  The  experiment  was  repeated  in  1861,  1863,  1864,  1873, 
1884,  1890,  1893,  1907  and  1914,  and  the  certificates  were  author- 
ized, but  not  issued,  in  1895.  In  i860  and  1873,  when  the  issues 
were  limited  to  ten  and  twenty  millions  respectively,  the 
equalization  of  reserves  was  effected  by  the  provision  that  the 
stronger  banks  should  turn  over  a  balance  to  the  weaker 
ones.  This  provision  was,  however,  dropped  after  1884. 
In  1873  the  method  was  adopted  in  six  more  cities,  in  1893  in 
several  more  and  in  1907  it  spread  over  the  whole  country. 
Although  action  was  often  taken  too  late,  it  frequently  suc- 
ceeded in  helping  to  tide  over  the  crisis,  and  forms  an  interest- 
ing illustration  of  the  advantages,  in  time  of  panic,  of  the  single 
or  combined  reserve  over  that  of  the  multiple  reserve.  The 
further  need  of  this  device  is  obviated  by  the  Federal  Reserve 


§  2oi]  Bank  Reserves  5 1  3 

act,  under  which  every  bank  must  now  keep  a  substantial  por- 
tion of  its  reserves  in  the  federal  reserve  bank  of  its  district. 

(2)  Since  the  reserve  is  designed  to  meet  immediate  obli- 
gations, it  must  be  composed  of  cash  or  something  that  is  in- 
stantly convertible  into  cash.  In  countries  which  possess  a 
legal-tender  paper  currency,  the  paper  is  sometimes  counted 
as  a  part  of  the  reserve,  but  as  this  cannot  ordinarily  be  used 
in  the  settlement  of  international  debts,  there  must  obviously 
be  a  reserve  of  coin  even  for  the  paper.  Other  components  of 
the  reserve  may  consist  of  demands  upon  other  banks  and 
individuals  which  are  immediately  realizable,  and  which  in 
America  are  included  under  the  rubric  "cash-items." 

When  we  leave  the  actual  cash  and  cash-items,  we  reach 
more  debatable  ground.  Ordinary  or  even  "gilt-edge"  and 
government  securities  are  no  substitute  for  a  cash  reserve,  be- 
cause in  times  of  trouble  they  may  not  be  salable  at  any  price. 
The  same  may  be  said  of  long-time  commercial  paper,  which 
although  perhaps  perfectly  safe,  is  not  instantly  convertible. 
It  is  obvious  that  those  banks  are  in  the  strongest  position 
which  hold  in  their  portfolios  short  bills  that  have  only  a  few 
days  to  run  and  that  have  been  rediscounted  by  other  strong 
banks.  At  bottom,  however,  in  order  to  inspire  complete 
confidence  and  to  insure  at  least  relative  security,  cash  demands 
can  be  met  only  by  cash  assets. 

Under  the  American  National  Bank  system  the  reserve  must 
consist  of  "lawful  money,"  by  which  is  meant  gold  coin  and 
bullion,  silver  dollars,  and  the  gold  certificates,  silver  certifi- 
cates, greenbacks,  and  treasury  notes.  "Lawful  money" 
includes  in  fact  all  the  forms  of  paper  currency  except  national 
bank  notes  and  the  new  federal  reserve  notes.  But  "lawful 
money"  must  not  be  confused  with  "legal-tender"  money; 
for  silver  dollars  and  silver  and  gold  cerlihcates  are  not  full 
legal  tender,  although  they  are  "lawful  money"  for  purposes  of 
the  reserve.  The  same  is  true  of  the  Clearing  House  ccrlill- 
cates.  Finally  the  legal  reserve  might  include,  until  1914,  not 
,13 


514  Credit  and  Banking  [§ 


201 


only  the  redemption  fund  of  five  per  cent  of  its  circulation, 
kept  by  each  bank  at  Washington,  but  also  the  "reserve  agents' 
balances."  This  refers  to  the  provision  permitting  ordinary 
banks  to  keep  three-fifths  of  their  reserve  on  deposit  in  the 
reserve  cities,  and  banks  in  the  reserve  cities  to  keep  one-half 
of  their  reserves  on  deposit  in  the  central-reserve  cities.^  Under 
the  new  law  the  5  %  redemption  fund  may  no  longer  be  counted 
as  a  reserve,  and  the  privilege  to  keep  the  reserves  in  the  reserve 
or  central-reserve  cities  disappeared  in  191 7.  But  one  half 
of  the  reserves  kept  by  any  bank  in  the  federal  reserve  bank 
may  henceforth  consist  of  approved  commercial  paper. 

(3)  The  proper  amount  of  the  reserve  is  sometimes  fixed 
by  law.  In  the  United  States,  national  banks  in  the  reserve  or 
central-reserve  cities  were  compelled  until  1914  to  keep  a  reserve 
of  25  per  cent,  and  other  banks  a  reserve  of  15  per  cent,  of 
their  deposits.  Under  the  new  law  the  federal  reserve  banks 
must  keep  a  reserve  of  35%  of  their  deposits,  while  the  reserves 
of  ordinary  member  banks  depends  partly  on  whether  the 
deposits  are  demand  deposits  (payable  within  30  days)  or  time 
deposits.      (See  footnote  on  opposite  page.) 

The  Bank  of  the  Netherlands  must  also  keep  a  specie  reserve 
of  40  per  cent,  but  this  is  applicable  to  notes  as  well  as  deposits. 
Ordinarily,  however,  it  depends  on  the  banks  themselves  to 
estimate  what  Bagehot  has  well  called  the  "apprehension 
minimum"  —  the  point  below  which  the  community  will  begin 
to  have  doubts  as  to  the  ability  of  the  bank  to  maintain  specie 
payments.  It  was  formerly  often  stated  that  a  "safe"  reserve 
is   one-third   of   the   liabilities.     No   such   hard   and  fast   rule, 

1  There  are  at  present  47  reserve  and  3  central-reserve  cities.  The 
laws  of  1887  and  1903  permit  any  city  of  200,000  and  25,000  population 
respectively  to  be  made  a  central  reserve  or  a  reserve  city,  on  application 
of  three-quarters  of  its  national  banks.  Chicago  and  St.  Louis  have 
been  the  only  places  to  avail  themselves  of  the  privilege,  which  New 
York  enjoyed  from  the  beginning,  of  a  central  reserve  city.  Under  the 
law  of  19 13  the  privilege  of  creating  or  abolishing  the  reserve  or  central 
reserve  cities  devolves  upon  the  Federal  Reserve  Board. 


§  20l] 


Bank  Reserves 


515 


however,  can  be  laid  down,  for  the  conditions  vary  not  only  from 
country  to  country  and  almost  from  city  to  city,  but  also  with 
the  changing  complexion  of  business  life.  A  reserve  which  is 
perfectly  adequate  at  one  period  may  be  entirely  insufficient  at 
another;  and  the  "apprehension  minimum"  will  itself  vary 
considerably  with  the  character  of  the  loans  and  discounts. 
In  England  the  reserve  of  the  Bank  of  England,  for  instance, 
has  varied  in  the  past  fifty  years  from  42  to  52  per  cent. 

A  statistical  study  of  the  bank  reserves  in  most  countries 
would  show  marked  fluctuations  not  only  in  themselves,  but  also 
as  measured  in  percentages  of  liabilities.  Of  these,  perhaps  the 
most  important  are  the  seasonal  fluctuations.  In  New  York, 
for  instance,  the  periodicity  is  marked.  From  January  to 
April  the  reserves  fall  because  the  farmers  need  funds  to  pre- 
pare for  planting  the  crops,  and  all  the  out-of-town  banks  call 
in  their  balances.  After  the  season  of  planting  and  spring 
clothes-buying  is  over,  the  funds  flow  back  to  New  York  and 
the  reserves  remain  fairly  constant,  except  during  the  first  week 

The  original  law  of  1913  provided  for  a  division  of  the  reserves 
between  the  member  bank  and  the  federal  reserve  bank  and 
vaiying  from  five  per  cent  for  time  deposits  up  to  from  twelve 
to  eighteen  percent  on  demand  deposits.  In  1917  it  was  decided 
that  all  reserves  should  thereafter  be  kept  in  the  federal  reserve 
banks,  and  it  thus  became  possible  to  reduce  the  reserve  require- 
ments.    These  are  henceforth  to  be  as  follows: 


Demand 
Deposits 

Time 
Deposits 

Banks  not  in  reserve  or  central-reserve 

cities 

Banks  in  reserve  cities 

Banks  in  central-reserve  titles 

13% 
10% 

7% 

3% 
3% 

3':j 

5  1 6  Credit  and  Banking  [§  201 

in  July,  when  the  semi-annual  payment  of  dividends  is  followed 
by  the  Fourth  of  July  festivities  with  their  demands  for  cash. 
Toward  the  end  of  the  summer  more  money  and  credit  are 
needed,  not  only  for  the  fall  purchases,  but  especially  for  the 
movement  of  the  gigantic  crops;  and  by  mid-autumn  the  re- 
serves are  at  their  lowest  ebb.  It  is  not  until  the  beginning  of 
November,  after  the  cessation  of  the  autumnal  drain,  that  the 
advance  is  again  perceptible.  Interesting  correlations  have 
been  worked  out  by  Norton,  Palgrave,  and  others  as  to  the 
ratio  of  reserves  to  deposits,  and  of  reserve  deviations  to  call 
discounts,  and  have  been  suggested  as  to  the  ratio  of  loan  devi- 
ations to  foreign-exchange  rates.  The  fluctuations  in  the  re- 
serve are  not  only  periodical  or  seasonal,  but  also  irregular  and 
unpredictable,  owing  to  exceptional  domestic  demands  or  inter- 
national complications.  Too  high  a  reserve  endangers  profits; 
too  low  a  reserve  imperils  solvency;  here,  as  elsewhere,  the 
balance  must  be  struck  between  cupidity  and  timidity. 

(4)  The  simplest  method  of  protecting  a  dwindling  reserve 
is  to  stop  lending.  Thus,  when  the  reserves  of  the  national 
banks  fall  below  the  legal  minimum,  the  law  prohibits  them 
from  increasing  their  liabilities  by  making  any  loans  or  dis- 
counts until  the  reserve  has  been  restored.  This,  however,  is 
an  heroic  measure,  which  sometimes  defeats  its  own  object. 
For  it  is  precisely  in  times  of  monetary  stringency  that  the 
greatest  liberality  is  needed.  Many  an  incipient  panic  has 
been  checked  by  the  mere  knowledge  that  the  banks  were 
ready  to  extend  their  loans,  on  the  familiar  psychological  prin- 
ciple that  when  a  man  believes  he  can  get  a  thing  he  is  not  so 
anxious  to  secure  it  at  once.  The  more  usual  and  less  drastic 
method,  therefore,  of  protecting  the  reserve  is  by  a  practice 
which  is  especially  suitable  in  case  of  a  slow  and  gradual  drain, 
namely,  by  increasing  the  rate  charged.  In  Europe  this  is  gen- 
erally called  the  discount  rate,  and  in  England  the  bank  rate, 
because  the  Bank  of  England  is  the  chief  lender;  but  in  the 
United  States,  where  up  to  1914  most  of  the  bank  advances 


§   20l] 


Bank  Reserves 


5^7 


took  the  shape  of  call  loans  in  New  York  with  the  interest  pay- 
able at  the  maturity  of  the  loan,  it  has  hitherto  been  called  the 
money  rate.  Under  the  new  law,  however,  there  will  now 
also  be  a  discount  rate.  In  countries  hke  France,  where  the 
banks  are  at  liberty  to  pay  out  either  gold  or  silver,  it  is  cus- 
tomary to  charge  a  slight  premium  on  gold  instead  of,  or  at  all 
events  prior  to,  raising  the  discount  rate. 

To  the  general  public  an  increase  in  the  discount  rate  is 
always  unwelcome;  but,  as  in  so  many  other  domains,  a  sta- 
bility of  rates,  even  with  a  moderately  high  level,  is  preferable 
to  the  continual  fluctuations  which  unsettle  business.  In  Eng 
land  the  bank  rate  from  1844  to  1900  varied  normally  from 
two  to  four  per  cent,  with  occasional  but  increasingly  rare  vari- 
ations up  to  ten  per  cent.  The  following  table  gives  the  rela- 
tive number  of  days  in  this  entire  period  on  which  the  respective 
bank  rate  was  charged: 


Bank  Rate 

Number  of  Davs 

Bank  Rate 

Number  of  Davs 

Per  cent 

Percentage  of  Wliole 

Percent 

Percentage  of  Whole 

2 

16.6 

5h 

13 

4 

14.6 

6 

43 

3 

23-9 

6i 

•4 

3i 

8.4 

7 

2.8 

4 

I3-I 

8 

1-3 

4i 

2-3 

9 

•S 

5 

9.8 

10 

•7 

In  the  Reichsbank  and  the  Bank  of  France  the  range  of 
variation  was  smaller.  The  maximum  was  9  per  cent  against 
10  per  cent  in  England,  and  the  minimum  in  Germany  was  3 
per  cent;  while  a  rate  of  over  7  per  cent  was  reached  in  only 
two  years,  and  a  rate  of  over  S  per  cent  only  one  year  in  France 
and  Germany  as  agaiiist  four  years  in  England.  Moreover, 
the  range  of  the  annual  fluctuations  is  greater  in  England  than 
in  France  or  Germany,  having  exceeded  3^  per  cent  only  once 


5  1  8  Credit  and  Banking  [§  202 

in  France  and  twice  in  Germany,  as  against  eleven  times  in 
England;  while  there  were  in  France  20  years  and  in  Ger- 
many 9  years,  but  in  England  only  3  years,  without  any  fluctu- 
ations at  all.  The  figures  for  England,  however,  are  sta- 
bility itself  when  compared  with  the  New  York  call  rate  for 
money,  which  varies  from  day  to  day,  and  which  has  several 
times  reached  a  minimum  of  f  of  i  per  cent  and  a  maximum 
of  186  per  cent,  rates  of  10,  15,  20,  and  25  per  cent  not  being 
at  all  uncommon.  The  reasons  for  this  remarkable  fact  will 
be  discussed  in  the  next  chapter. 

It  is  obvious  from  what  has  preceded  that  successful  banking 
depends  largely  on  the  management  of  the  reserve.  The  sol- 
vency of  a  bank  and  its  capacity  to  extend  credit  facilities 
are  far  more  than  a  matter  of  concern  merely  to  the  stock- 
holders and  the  immediate  customers.  The  modern  bank  is, 
so  to  say,  the  nerve  centre  of  the  business  world.  A  shock  to 
its  credit  at  once  ramifies  throughout  the  community,  and  its 
failure  may  paralyze  enterprises  that  seem  to  be  only  remotely 
connected  with  the  particular  interests  involved.  The  problem 
of  bank  reserves  is  the  one  of  central  importance  in  the  subject 

of  credit. 

202.   Credit  and  Prices 

It  is  from  this  point  of  view,  therefore,  that  we  must  approach 
the  question  of  the  influence  of  credit  upon  prices.  Some 
writers,  like  INIill,  assert  that  since  credit  virtually  means  pur- 
chasing power,  credit  acts  on  prices  exactly  as  money  does. 
On  the  exchanges  cotton  and  wheat  futures  are  no  less  instru- 
mental in  fixing  prices  than  cash  sales.  So  here,  instead  of 
transacting  business  with  "spot  gold,"  "gold-futures"  or  credit 
are  used.  The  greater  the  use  of  credit,  the  larger  the  number 
of  purchases,  and  therefore  the  higher  will  be  the  level  of  prices. 

This  theory  of  the  substantial  identity  of  credit  and  money, 
as  purchasing  power,  overlooks  the  fact  that  in  a  credit  opera- 
tion only  one-half  of  the  transaction  takes  place  now.  Where 
money  is  used,  the  transaction  is  completed  at  once,  —  money 


§  202]  Credit  and  Prices  510 

and  commodities  cliange  hands;  wiiere  credit  is  used,  the  com- 
modity changes  hands  now,  but  the  debt  incurred  must  be  paid 
in  the  future.  In  other  words,  it  is  a  question  not  simply  of 
purchasing  power,  but  of  Hquidating  power.  This  considera- 
tion has  led  writers  hlce  Walker  to  assert  that  credit  has  no  in- 
llucnce  at  all  on  prices,  because  the  debts  created  by  such  a 
transaction  are  ultimately  cancelled  by  the  credits. 

The  truth  lies  midway  between  these  two  positions.  If  all 
credit  operations  were  absolutely  automatic,  and  if  confidence 
in  ultimate  payment  were  so  complete  that  actual  money  were 
never  demanded,  credit  would  be  a  perfect  substitute  for  money, 
and  influence  prices  just  as  money  does.  In  point  of  fact,  how- 
ever, confidence  is  never  so  complete.  The  banks  must  always 
keep  a  certain  amount  of  money  on  hand  to  meet  possible  de- 
mands. The  debts,  in  other  words,  are  never  entirely  cancelled 
by  the  credits  because,  as  the  future  ripens  into  the  present, 
the  conditions  of  the  market  change.  There  will  always  have 
to  be  a  certain  balance  which  a  prudent  bank  must  retain. 
This  balance  measures  the  real  influence  of  credit  on  prices. 
It  is  quite  true  that  credit  is  purchasing  power,  and  thus  tends 
to  raise  prices;  but  credit  is  not  to  the  same  extent  liquidating 
power.  In  order  to  serve  as  a  basis  for  the  credit  operations 
a  certain  quantity  of  coin  must  be  impounded  as  a  reserve. 
Thus  the  medium  of  the  entire  transaction  is  in  the  broad  sense 
the  credit  less  the  reserve:  as  purchasing  power  the  credit 
alone  operates,  as  liquidating  power  the  credit  must  be  supple- 
mented by  the  reserve.  Since  the  money  so  reserved  is  sub- 
tracted from  what  would  otherwise  enter  circulation,  there  is 
less  money  disposable  for  actual  cash  transactions,  or,  in  other 
words,  the  price  level  is  lower  than  it  would  otherwise  be.  The 
credit  thus  tends  to  raise  prices,  the  reserve  to  lower  prices. 
The  reserve,  however,  is  always  much  smaller  than  the  credit 
transactions,  for  there  would  otherwise  be  no  advantage  in  using 
credit.  The  net  result,  therefore,  is  that  credit  raises  prices  to 
a  certain  point. 


520  Credit  and  Banking  [§  202 

Credit,  in  other  words,  although  it  exerts  by  no  means  the 
same  amount  of  influence  on  price  that  money  does,  exerts 
the  same  kind  of  influence.  The  reason  that  it  does  not  exert 
the  same  amount  of  influence  is  that  a  portion  of  its  ideal 
efficacy  as  a  substitute  for  money  is  lost  through  the  necessity 
of  keeping  on  hand  a  reserve  for  which  no  substitute  can  be 
employed.  The  extent  of  this  reserve  is  a  measure  of  the  in- 
completeness of  the  substitution,  and  therefore  of  the  degree  to 
which  credit  fails  to  equal  money  in  affecting  price.  The  differ- 
ence between  a  "wheat-future"  and  a  credit  or  a  "gold-future" 
is  that  a  reserve  is  unnecessary  in  the  one  case,  but  requisite  in 
the  other. 

This  also  serves  to  explain  why  credit  cannot  increase  prices 
indefinitely.  It  is  indeed  true  that  an  enhanced  use  of  credit 
marks  a  period  of  rising  prices.  It  is  precisely  in  such  times, 
however,  that  prudent  bankers  will  be  solicitous  about  their  re- 
serves, and  make  every  effort  either  to  increase  their  reserves 
or  to  diminish  their  loans.  Money  becomes  "tight,"  the  rate 
of  discount  rises,  and  the  increase  of  price  tends  to  arrest  itself. 
A  speculative  mania  may  indeed  supervene,  and  prudence  for 
a  time  be  cast  to  the  winds,  with  a  dangerous  discrepancy 
between  bank  liabilities  and  quick  assets.  This  will,  however, 
lead  to  a  crisis,  to  be  discussed  in  §  209;  and  when  the  bubble 
of  inflated  values  is  inevitably  pricked,  the  price  level  will  again 
fall.  All  prices  must  finally  be  reduced  to  the  basis  of  metallic 
money,  and  with  a  given  quantity  of  money  the  oscillations  in 
the  price  level,  so  far  as  the  effect  of  credit  is  concerned,  depend 
upon  the  proportion  between  the  money  in  circulation  and 
that  used  as  a  reserve  for  credit  transactions. 


CHAPTER  XXXI 

CREDIT  AND  CURRENCY 

203.   References 

W.  S.  Jevons,  Money  (1879),  chs.  xvii,  xviii,  xxiv;  C.  F.  Dunbar' 
Chapters  on  the  History  and  Theory  of  Banking  (2d  ed.,  1901),  chs.  v-vi: 
J.  F.  Johnson,  Money  and  Currency  (1905),  chs.  vii  and  xv;  H.  White, 
Money  and  Banking  (4th  ed.,  1912),  bk.  iii,  chs.  ix-xvii;  R.  G.  Hawtrey, 
Ciirroicy  and  Credit  (1920);  L.  H.  Langston,  Practical  Bank  Operation 
(2  vols.,  1921);  P.  M.  Warburg,  Essays  in  Banking  Reform  in  the  U.  S. 
(1914);  T.  Straker,  The  Money  Market  (1904);  Reports  and  Publications 
of  the  National  Monetary  Commission  (1910-1912);  The  Currency  Prob- 
lem, Addresses  at  Columbia  University  (1908);  E.  W.  Kemmerer,  The 
A  B  C  of  the  Federal  Reserve  Systetn  (191 8). 

Crises.  E.  D.  Jones,  Economic  Crises  (1900);  T.  E.  Burton,  Finan- 
cial Crises  (1902);  C.  Juglar,  Brief  History  of  Panics  in  the  United  States 
(trans,  by  Thomm,  1893);  W.  C.  Mitchell,  Business  Cycles  (1913); 
O.  M.  W.  Sprague,  A  History  of  Crises  under  the  National  Banking  Sys- 
tem (1910);  H.  L.  Moore,  Business  Crises  (1915);  D.  H.  Robertson, 
A  Study  of  Industrial  Fluctuation  (1915). 

204.   Banks  of  Issue 

The  issue  of  bank  notes  was  at  first  entirely  free.  It  was 
soon  seen,  however,  that  the  notes  served  as  currency,  and  the 
question  arose  as  to  the  nature  of  the  steps  to  be  taken  to  in- 
sure their  safety.  This  consideration  led  to  four  distinct  sets 
of  problems:  (i)  Should  the  bank  be  a  public  or  a  private 
institution?  (2)  Should  a  particular  bank  have  a  monopoly 
of  note  issue?  (3)  What  should  be  the  character  and  de- 
nominations of  the  notes?  (4)  Should  there  be  any  legal 
regulation  of  the  methods  of  emission? 

(i)  Government  banks  of  issue  are  comparatively  rare.  The 
chief  examples  are  the  Russian,  the  Swedish,  and  the  Bulgarian 
bank.     Far  more  common  are  the  central  banks,  whose  capital 

521 


52  2  Credit  and  Currency  [§  204 

is  provided  by  private  individuals,  hul  where  a  considerable 
degree  of  control  is  exercised  by  the  government.  Of  these  the 
chief  instance  is  the  Bank  of  France. 

This  was  founded  in  1800  as  a  purely  private  bank,  but  re- 
ceived the  monopoly  of  note  issue  in  1803  and  became  a  pub- 
lic institution  in  1806,  the  management  being  henceforth  vested 
in  a  governor  and  two  assistants  appointed  by  the  state.  Al- 
though several  independent  banks  were  in  the  interval  accorded 
the  privilege  of  note  issue,  the  monopoly  was  re-established 
in  1848.  In  all  the  government  and  quasi-public  banks,  except 
the  Reichsbank  of  Germany,  and  the  National  Bank  of  Greece 
(where,  however,  the  monopoly  will  begin  in  191 7),  there  is  also 
a  monopoly  of  note  issue,  and  in  almost  all  cases  a  system  of 
branch  banks. 

The  Bank  of  England  is  technically  a  purely  private  institu- 
tion. But  when  it  was  founded  in  1694,  its  stockholders  were 
composed  of  subscribers  to  a  loan  to  the  government,  which 
conferred  upon  it  special  privileges,  and  the  bank  has  for  a 
long  time  acted  as  the  fiscal  agent  of  the  government.  It 
is  practically,  although  not  legally,  a  quasi-public  institution. 

In  the  United  States  there  have  been  government  banks, 
both  national  and  state,  but  never  with  any  monopoly  of  issue. 
The  first  and  second  Banks  of  the  United  States,  which  existed 
from  1791  to  181 1  and  from  1816  to  1836,  were  private  banks, 
one-fifth  of  the  capital,  however,  being  subscribed  by  the  gov- 
ernment, which  was  represented  on  the  board  and  which  utilized 
the  banks  as  fiscal  agents.  Many  commonwealths  in  the  South 
and  Middle  West  established,  between  1820  and  1840,  banks 
managed  by  state  ofHicials,  in  which  the  capital  was  subscribed 
either  in  whole  or  in  part  by  the  state  government.  Such 
"state"  banks  existed  in  Kentucky,  Tennessee,  Missouri,  Dela- 
ware, Alabama,  the  Carolinas,  Georgia,  Florida,  JNIississippi, 
Louisiana,  Vermont,  Illinois,  Ohio,  and  Indiana,  almost  all  of 
them,  with  the  notable  exception  of  the  last  two,  being  recklessly 
managed  and  coming  to  a  disastrous  end. 


§204]  Banks  of  Issue  52-^ 

(2)  So  far  as  the  right  of  note  issue  is  concerned,  there  are 
three  systems:  (a)  monopoly  of  emission;  (b)  the  mixed  system, 
with  the  privilege  of  issue  accorded  to  only  a  small  number  of 
banks;  and  (c)  decentralization  of  issue. 

Monopoly  of  issue  is  ordinarily  confined  to  the  government 
or  quasi-public  banks.  But  it  is  also  sometimes  accorded  to  a 
purely  private  bank,  as  in  the  case  of  the  Imperial  Ottoman 
Bank  in  Turkey  at  present,  or  of  the  Bank  of  Scotland  during 
the  two  decades  after  its  inception  in  1695.  The  chief  examples 
of  the  mixed  system  are  at  present  England  and  Germany. 

The  Bank  of  England  received  the  right  of  note  issue  in 
1697  with  the  understanding  that  no  other  bank  should  be 
authorized.  This  did  not,  however,  mean  a  monopoly  of  bank- 
ing. For  not  only  was  "bank"  used  in  the  sense  of  bank  of 
issue,  thus  in  no  wise  preventing  other  classes  of  banking  trans- 
actions by  outsiders,  but  it  did  not  apply,  as  was  explicitly 
stated  in  1707,  to  the  issues  of  notes  by  individuals  or  partner- 
ships. The  London  private  bankers  discontinued  their  note 
issues  before  the  end  of  the  eighteenth  century,  but  the  country 
bank  notes  have  persisted  to  this  day.  In  1826  the  right  of 
note  issue  was  granted  to  joint-stock  companies  when  over 
65  miles  from  London.  In  1844,  however.  Peel's  Act  forbade 
the  creation  of  any  more  joint-stock  banks  of  issue,  and  pro- 
vided that  when  any  of  the  existing  banks  (which  were,  more- 
over, prohibited  from  increasing  their  circulation)  should 
abandon  its  right  of  issue,  the  Bank  of  England  might  add  to 
its  authorized  issue  two-thirds  of  the  sums  thus  lapsed.  In 
1844  the  279  banks  had  an  authorized  issue  of  £8,631,647,  as 
against  somewhat  more  than  fourteen  millions  of  the  Bank  of 
England;  by  the  close  of  191 2  there  remained  only  23  banks 
(12  private  and  11  joint  stock),  with  an  authorized  issue  of 
£1,204,490,  as  against  £18,450,000  of  the  Bank  of  England. 

In  Germany  there  was  great  confusion  until  1875,  at  which 
time  there  were  32  banks  of  issue  in  addition  to  the  reor- 
ganized Reichsbank.     The  issue  of  notes  by  these  was  subject 


524  Credit  and  Currency  [§  204 

lo  numerous  restrictions,  and  it  was  jjrovided  thai  when  any 
of  them  surrendered  their  right  of  issue,  the  whole  of  the  equiv- 
alent sums  were  to  be  added  to  the  authorized  uncovered  issue 
of  the  Reichsbank.  In  1875  the  banks  had  the  right  of  issuing 
135  million  marks  of  notes  (as  against  250  millions  of  the  Reichs- 
bank) over  and  above  the  coin  reserve;  by  1914  all  but  four  of 
the  banks  had  abandoned  their  note  issues  as  unprofitable,  the 
four  still  possessing  the  right  of  issuing  68,771,000  marks  of 
uncovered  notes  as  against  472,829,000  marks  allotted  to  the 
Reichsbank.  Thus  Germany,  like  England,  is  on  the  high- 
road toward  a  centralization  of  note  issue. 

The  chief  example  of  decentralization  was  until  recently  that 
of  the  United  States.  At  the  outset,  however,  the  privilege  of 
note  issue  was  granted  only  by  special  charter.  The  democratic 
wave  of  the  Jacksonian  era  replaced  the  charter  method  by  the 
Free  Banking  system.  Under  this  scheme,  which  originated  in 
New  York  in  1838,  any  association  could  freely  issue  bank 
notes  on  complying  with  certain  formalities.  As  a  consequence, 
there  were  in  1861  over  1600  state  banks  of  issue.  When  the 
national  banks  were  created,  the  privilege  of  note  issue  was 
taken  away  from  the  state  banks  by  the  imposition  of  a  ten  per 
cent  tax,  applicable  in  1866.  The  number  of  national  banks  has 
grown  until,  in  June,  1915,  there  were  in  operation  7,560,  each 
with  its  right  of  issue.  The  law  of  1913,  however,  restricts  to 
the  twelve  federal  reserve  banks  the  privilege  of  issuing  the  new 
federal  reserve  notes,  and  provides  for  the  gradual  retirement  of 
the  existing  national  bank  notes. 

(3)  The  third  problem  mentioned  above  refers  to  the  char- 
acter and  denomination  of  bank  notes.  Since  bank  notes  are 
simply  promissory  notes,  the  government  does  not  ordinarily 
invest  them  with  legal-tender  quality.  In  some  cases,  however, 
the  government  signifies  its  willingness  to  receive  the  notes 
for  public  dues,  as  in  the  United  States,  where  bank  notes  are 
receivable  for  any  payments  to  the  government  except  for 
import  duties,   and  for  payments  by   the  government   except 


§205]  Regulation  of  Note  Issue  525 

for  interest  on  the  public  debt.  In  the  new  federal  reserve  notes 
these  exceptions  are  removed.  In  a  few  countries  bank  notes  are 
even  legal  tender,  as  in  the  Bank  of  England,  the  Bank  of  France, 
and  since  1909  the  German  Reichsbank.  In  England,  however, 
this  applies  only  as  long  as  the  notes  are  kept  convertible. 

The  acceptance  by  the  banks  of  each  other's  notes  at  par  is 
either  a  matter  of  mutual  arrangement,  or  prescribed  by  law,  as 
in  Germany  and  the  United  States. 

The  denominations  of  the  notes  depends  partly  on  the  de- 
sire of  the  government  to  minimize  the  use  of  coin,  and  partly 
on  the  existence  of  other  paper  money.  When  the  notes  are 
irredeemable  legal  tender,  and  thus  virtually  ^fiat  money,  the 
minimum  wUl  naturally  be  smaller.  In  the  Bank  of  England 
it  was  originally  £20,  but  since  1793  £10,  and  since  1829  £5. 
During  the  period  of  bank  restriction  it  was  as  low  as  £1,  and 
during  the  war  of  19 14  as  low  as  los.  In  France  and  Italy  it 
is  50  francs  ($10);  in  Germany  it  was  until  1906  100  marks, 
but  it  is  now  20  marks  ($5),  as  is  the  case  also  in  Scotland 
with  the  £1  notes.  In  the  United  States  the  minimum  in  the 
case  of  the  national  bank  notes  was  originally  $1,  but  since 
1879  is  $5. 

205.   Regulation  of  Note  Issue 

The  two  theories  as  to  the  regulation  of  note  issues  arose  at 
the  time  of  the  controversies  preceding  the  English  Bank  act 
of  1844.  They  are  known  as  the  currency  and  the  banking 
principle,  respectively.  The  currency  principle,  first  so-called 
by  Mr.  George  W.  Norman  in  1840,  was  advocated  not  only 
by  him,  but  by  Lord  Overstone  and  Colonel  Torrens,  and  was 
accepted  by  Sir  Robert  Peel.  The  banking  principle  was 
championed  by  Messrs.  Tooke,  FuUarton,  Wilson,  and  Gilbart, 
and  was  accepted  in  part  by  John  Stuart  Mill.  The  currency 
principle  states  that  whereas  in  the  case  of  a  metallic  currency 
all  the  specie  cannot  be  exported,  for  the  reason  that,  as  the  coin 
goes  out,  prices  will  fall,  exports  increase  and  money  again  flow 


526  Credit  and  Currency  [§  205 

in,  on  the  other  hand  an  issue  of  bank  notes  may  expel  the  specie 
because  the  total  volume  of  money,  now  composed  of  coin  and 
notes,  will  be  at  least  no  smaller  than  before.  Hence,  to  prevent 
the  notes  from  becoming  redundant,  safeguards  must  be  adopted. 

The  weakness  of  this  reasoning  lies  chiefly  in  overlooking  the 
fact  that  bank  deposits  act  precisely  like  bank  notes.  The  ad- 
vocates of  the  banking  principle  pointed  out  that  if  the  banks 
could  affect  prices  and  the  stock  of  coin  by  increasing  their 
note  issue,  they  could  do  the  same  by  expanding  their  deposits. 
A  restriction  on  note  issue  would  therefore  in  itself  be  futile. 
In  point  of  fact  the  banking  theorists  denied  that  inflation  was 
possible  in  either  case,  since  both  notes  and  deposits  are  issued 
in  response  to  an  actual  demand.  As  long  as  bank  paper  is 
convertible,  they  claim  that  there  can  be  no  redundancy,  be- 
cause if  there  were  an  issue  greater  than  the  real  demand,  the 
notes  would  at  once  automatically  return  to  the  bank. 

The  truth  again  lies  in  the  middle.  The  banking  theory  was 
undoubtedly  correct  in  emphasizing  the  analogy  between  notes 
and  deposits,  and  in  stating  that  the  aggregate  of  currency  is  not 
likely  to  be  permanently  increased  by  an  issue  of  notes.  It 
failed,  however,  to  observe  that  as  the  bank  notes  are  returned 
to  the  bank,  specie  may  be  paid  out  in  exchange,  and  that  while 
the  aggregate  circulation  may  remain  the  same,  its  proportions 
may  be  altered.  Even  though  the  redundant  notes  automati- 
cally return  to  the  bank,  it  is  precisely  this  returii  which  may 
exhaust  the  coin  reserve  and  thus  jeopardize  the  entire  issue. 

As  a  consequence,  all  nations  impose  some  restrictions  on 
bank  issues  which  affect  either  the  amount  of  emission,  the 
nature  of  the  reserve,  or  the  character  of  the  security.  They 
are  of  six  chief  kinds:  the  maximum-amount,  the  fixed-re- 
serve, the  variable-reserve,  the  emergency-circulation,  the  safety- 
fund,  and  the  bond-deposit  systems.^ 

1  Jevons:  Money,  218-235,  mentions  fourteen  different  methods:  the 
simple  deposit,  the  partial  deposit,  the  minimum  reserve,  the  proportional 
reserve,  the  maximum  issue,  the  elastic  limit,  the  documentary  reserve,  the 


§  205]  Regulation  of  Note  Issue  527 

(i)  A  good  example  of  the  first  method  is  that  employed 
in  France.  Apart  from  the  requirement  that  all  paper  dis- 
counted must  be  three-name,  the  only  restriction  on  the  Bank  of 
France  is  the  fixing  of  issues  at  a  maximum,  originally  set  in  1870, 
at  1800  million  francs,  but  reaching  6800  millions  in  191 1  and 
enormously  increased  during  the  Great  War.  This  method,  how- 
ever, reverses  the  true  principle,  restricting  what  should  be  left 
free  and  leaving  free  what  should  be  restricted.  In  France, 
however,  the  maximum  is  so  high  that  it  does  not  really  act  as 
a  rigid  check  to  the  desirable  elasticity. 

(2)  The  fixed-percentage  reserve  is  found  in  Switzerland, 
where  the  law  of  1905  requires  40  per  cent  of  the  circulation  to 
be  kept  as  a  specie  reserve.  The  same  is  true  in  the  Nether- 
lands, with  the  exception  that  the  reserve  applies  to  deposits 
as  well  as  to  note  issues,  and  that  the  restriction  may  be  sus- 
pended in  case  of  emergency.  The  Dutch  method  is  in  accord 
with  the  sound  principle  that  deposits  and  notes  are  really 
equivalent  forms  of  credit. 

(3)  The  variable  percentage  is  best  illustrated  by  England. 
Here  the  regulation  takes  the  form  of  a  fixed  limit  of  uncov- 
ered note  issues,  with  a  specie  equivalent  for  additional  issues. 
The  Issue  Department  is  allowed  to  emit  notes  only  against  a 
corresponding  amount  of  government  securities,  gold,  or  bul- 
lion. The  Banking  Department  must  deposit  with  the  Issue 
Department  £14,000,000  of  securities  and  for  every  pound  of 
notes  above  that  sum  the  Issue  Department  must  hold  coin  or 
bullion.  The  business  of  the  Issue  Department  is  thus  limited 
to  exchanging  notes  for  coin  or  vice  versa,  and  if  the  Banking 
Department  desires  any  notes,  it,  like  any  one  else,  must  deposit 
specie.  Under  the  provision  referred  to  above,  the  amount  of 
securities  held  by  the  Issue  Department  might  be  augmented  by 

real-property  reserve,  the  loreign  exchange,  the  free  issue,  the  gold  par, 
the  revenue  payments,  the  deferred  con\ertil)ility,  and  the  paper  money 
method.  They  may,  however,  be  substantially  reduced  to  those  men- 
tioned in  the  text. 


528  Credit  and  Currency  [§  206 

two-thirds  of  the  lapsed  country  note  issues,  and  the  uncovered 
notes  have  accordingly  grown  to  £18,450,000  by  1914.  The 
total  circulation  during  the  past  two  decades  has  varied  from 
about  35  to  60  millions,  making  the  uncovered  issues  from  a 
half  to  a  third  of  the  whole. 

The  chief  objection  to  the  English  system  is  that  it  purchases 
safety  at  the  cost  of  an  insufficient  elasticity.  In  fact,  on  three 
separate  occasions,  namely  1847,  1857,  and  1866,  it  was  found 
necessary  to  suspend  the  act  and  to  permit  the  issue  of  notes 
on  government  securities.  Of  more  recent  years  the  short- 
comings of  the  system  have  been  reduced  not  only  by  the 
great  growth  in  the  actual  specie  reserve,  but  also  by  the  in- 
creased importance  of  deposit  as  contrasted  with  note  currency. 

(4)  The  system  of  emergency  circulation  was  first  tried  in 
Germany.  The  Reichsbank  is  empowered  to  issue  a  so-called 
contingent  circulation,  of  550  millions,  subject  to  the  provision 
that  one-third  of  the  issue  be  covered  by  cash  (coin,  bullion, 
treasury  notes,  and  notes  of  the  other  four  banks)  and  the  re- 
maining two-thirds  by  discounted  bills.  When  the  bank  desires 
to  increase  its  notes,  it  may  emit  a  so-called  excess  issue  on  the 
payment  of  a  tax  of  five  per  cent  per  annum,  payable  weekly. 
The  chief  criticism  that  can  be  urged  against  this  scheme  is  the 
calculation  of  the  excess  issue  according  to  the  "contingent" 
rather  than  the  cash  reserve.  For  a  large  issue  with  over 
50  per  cent  reserve  may  be  taxed,  while  a  smaller  issue  with 
only  one-third  reserve,  and  therefore  far  less  safe,  may  go  un- 
taxed because  not  exceeding  the  "contingent." 

The  four  methods  thus  far  discussed  involve  some  form  of 

asset  currency,  i.e.,  the  system  of  issuing  notes  on  the  basis  of 

banking  assets  in  which  a  coin  reserve  plays  a  certain  role.     A 

radically  different  system  was  until  recently  found  in  the  United 

States. 

206.   The  American  Systems 

The  American  banks  before  the  Civil  War  were  to  an  over- 
whelming degree  banks  of  issue  rather  than  of  discount,  and 


§  2o6]  The  American  Systems  529 

may  be  classed  under  four  systems;  general-asset  banking,  the 
Suffolk  system,  the  safety-fund  system,  and  the  bond-deposit 
system. 

(i)  The  issue  of  notes  on  general  assets,  with  but  few,  if 
any,  restrictions,  was  at  first  the  usual  practice.  In  both  the 
first  and  the  second  Banks  of  the  United  States  the  only  restric- 
tion was  the  limitation  of  the  notes  to  the  amount  of  capital. 
In  many  of  the  state  banks  even  this  restriction  was  lacking. 
The  wave  of  ill-managed  banks  spread  from  New  England  to 
the  South  and  West,  until  they  culminated  in  the  "wild-cat" 
and  "coon-box"  banks  of  the  frontier.  From  1837  on,  when 
a  distinct  improvement  began,  there  was,  however,  the  greatest 
variety,  ranging  from  the  rigid  requirements  of  Louisiana  to 
the  almost  complete  freedom  in  some  of  the  border  states. 

(2)  The  Suffolk  Bank  system  was  in  effect  a  method  to  se- 
cure the  immediate  redemption  of  the  notes.  It  rested  on  the 
significant  distinction  between  ultimate  security  and  immediate 
convertibility.  The  Boston  banks  found  that  they  could  not 
keep  their  notes  in  circulation,  as  they  were  being  crowded  out 
by  the  country  bank  issues  which  were  received  by  them  only 
at  a  discount.  In  order,  therefore,  to  maintain  the  country 
issues  at  par,  the  Suffolk  Bank  was  incorporated  in  181 8  and 
the  system  was  perfected  in  1824.  The  Suffolk  Bank  agreed 
to  redeem  at  par  in  specie  the  notes  of  any  bank  which  kept  on 
permanent  deposit  with  it  the  sum  of  at  least  $2000  plus  an 
amount  sufficient  to  redeem  the  notes,  charging  interest  only 
on  the  excess,  but  agreeing  to  credit  to  any  such  bank  the  bills 
of  any  other  bank  in  good  standing  that  it  might  send  in.  The 
country  banks,  which  at  first  strenuously  resisted,  soon  found 
that,  unless  they  consented,  their  notes  would  suffer  in  good 
repute.  As  a  result  the  Suffolk  Bank  acted  as  a  kind  of  clearing- 
house, each  bank  in  the  system  being  allowed  to  pay  out  only 
its  own  notes  and  sending  to  the  Suffolk  Bank  weekly  the  bills  of 
the  other  banks  received  by  it.  In  this  way  aU  the  notes  were 
kept  at  par,  and  there  was  little  need  of  actual  cash  redemption. 


5 30  Credit  and  Currency  [§  206 

(3)  The  Safety  Fund  plan  was  initiated  by  New  York  in 
1829.  Each  bank  in  the  system  was  obligated  to  pay  to  the 
state  treasurer  an  annual  sum  equal  to  one-half  of  one  per  cent 
of  its  capital,  until  it  reached  three  per  cent.  This  "Bank- 
fund"  was  to  be  applied  to  the  redemption  of  the  notes  of  any 
insolvent  bank.  Unfortunately  it  was  made  responsible  for  the 
other  liabilities  as  well,  and  it  was  not  until  1842,  after  several 
failures,  that  the  fund  was  restricted  to  the  notes.  This  was, 
however,  too  late,  and  the  redemption  of  the  notes  was  sus- 
pended for  a  time,  the  fund  being  subsequently  replenished  by 
mortgaging  future  payments.  As  the  charters  of  the  banks 
belonging  to  the  system  expired,  the  system  itself  melted  away. 
Had  the  fund,  however,  been  applied  from  the  outset  only  to 
notes,  it  would  have  been  ample.  The  safety  fund  exists  since 
1890  as  a  feature  of  the  Canadian  system. 

(4)  The  Bond  Deposit  system  also  originated  in  New  York. 
Under  the  Free  Banking  Law  of  1838,  any  bank  might  issue 
notes,  to  be  provided  by  the  state  comptroller,  on  depositing 
with  him  an  equivalent  amount  of  stock  of  the  United  States, 
of  New  York,  or  of  any  other  state  approved  by  him.  Un- 
fortunately, bonds  and  mortgages  on  real  estate  worth  double 
the  mortgage  might  also  be  deposited,  with  a  result  that  the 
notes  of  insolvent  banks  which  had  made  such  deposits  were 
redeemed  in  1841-1842  at  a  discount  of  25  per  cent.  The 
deposits  were  subsequently  limited  to  Federal  and  New  York 
stock,  and  the  security  of  the  notes  was  thereafter  unquestioned. 
But  in  many  other  states  which  adopted  the  scheme,  these 
safeguards  were  not  observed,  and  the  security  was  frequently 
worthless.  Moreover,  even  when  the  security  was  ample,  there 
was  no  elasticity. 

The  result  of  these  various  methods  was,  in  1861,  a  hetero- 
geneous jumble  of  good,  bad,  and  indifferent  banks,  with  notes 
lacking  in  uniformity  and  of  all  degrees  of  acceptability. 

The  National  Bank  system  was  devised  to  secure  a  market 
for  the  war  debt,   and  to  provide  a  uniform  currency.     The 


§  2o6]  The  American  Systems  5  3  i 

former  object  was  attained  by  adopting  the  bond-deposit  system 
of  New  York,  the  latter  by  taxing  the  state  bank  notes  out  of 
existence.  Under  the  act  of  1863,  perfected  in  1864,  any  bank 
with  a  capital  of  at  least  $50,000  could  secure,  from  the  Comp- 
troller of  the  Currency,  bank  notes  not  exceeding  the  amount 
of  its  capital  stock  and  equal  to  90  per  cent  of  the  market  value 
of  the  United  States  bonds  deposited  with  him.  The  banks  were 
held  to  redeem  these  notes,  not  only  over  their  own  counters,  but 
at  selected  agencies  in  the  principal  centres,  known  as  reserve 
cities.  To  provide  for  such  redemption  the  banks  were  to  keep 
as  a  reserve  in  lawful  money  15  per  cent  or,  in  case  of  the  reserve- 
city  banks,  25  per  cent  of  the  circulation  and  deposits.  On  fail- 
ure of  a  bank  to  redeem  its  notes,  the  government  was  to  do  so. 

Originally  the  total  issues  were  restricted  to  $300,000,000. 
For  various  reasons  the  West  and  South  had  not  secured  their 
due  proportions  of  note  issues,  and  the  act  of  1865  accordingly 
sought  to  favor  the  smaller  banks  by  restricting  the  circulation 
of  the  larger  banks  and  by  apportioning  one-half  of  the  circula- 
tion to  the  various  states  according  to  population.  In  1875, 
all  restrictions  were  swept  away  by  the  Resumption  Act.  The 
law  of  1874  in  the  mean  time  permitted  the  banks  voluntarily 
to  reduce  their  circulation  up  to  a  total  of  $55,000,000,  and  it 
substituted  for  the  redemption  agencies  in  the  reserve  cities  a 
system  of  government  redemption,  each  bank  being  now  obli- 
gated to  keep  in  lawful  money  a  redemption  fund  of  5  per  cent 
of  its  circulation  in  the  Treasury  at  Washington.  The  required 
reserve  was  at  the  same  time  made  applicable  henceforth  only 
to  notes,  instead  of  to  deposits  and  notes  conjoined. 

By  the  act  of  1882,  the  total  amount  by  which  all  the  banks 
might  reduce  their  circulation  was  limited  to  three  millions  a 
month,  and  a  bank  reducing  its  circulation  was  prohibited  from 
again  increasing  it  within  six  months.  These  last  provisions 
were  unfortunate,  for  they  emphasized  the  existing  inflexibility 
of  the  system,  not  only  by  setting  a  rigid  minimum  limit  but  by 
rendering  impossible  any  immediate  rebound. 


532  Credit  and  Currency  [§  206 

Three  points  now  became  evident.  In  the  first  place,  the 
national-bank  circulation,  instead  of  furnishing  the  major  part 
of  the  paper  currency,  as  had  been  originally  contemplated, 
constituted  only  a  small,  and  in  general  diminishing,  propor- 
tion. Many  of  the  largest  banks  in  New  York  issued,  and  still 
issue,  no  notes  at  all,  making  their  chief  profits  on  deposits. 
In  the  second  place,  a  comparison  of  the  fluctuations  in  circula- 
tion, as  shown  in  the  chart  on  page  532,  with  the  oscillations  in 
the  price  of  bonds  convinced  many  that  some  of  the  banks  were 
utilizing  the  bond-deposit  provision  to  speculate  in  the  bond 
market  rather  than  to  provide  a  currency.  Thirdly,  the  restric- 
tion of  banks  to  those  with  a  minimum  capital  of  $50,000, 
coupled  with  the  absence  of  any  provision  for  branches,  pre- 
vented adequate  banking  facilities  in  the  rural  districts  and  led 
to  a  great  spread  of  state  banks,  often  with  a  capital  as  low  as 
$10,000  or  $5000. 

By  the  act  of  1900  the  minimum  capital  was  lowered  tc 
$25,000,  the  tax  on  circulation  was  reduced  from  i  to  one-half 
of  I  per  cent,  and  all  banks  were  now  allowed  to  issue  notes  up 
to  100  per  cent  of  the  bonds  deposited.  As  a  consequence  of 
these  laws,  the  circulation  gradually  rose  from  242  millions  in 
1899  to  802  millions  in  June,  191 5.  In  1907  another  slight  im- 
provement was  added  by  the  provision  permitting  the  banks  to 
reduce  their  circulation  by  a  total  amount  not  exceeding  nine 
(instead  of  the  former  three)  millions  a  month. 

The  defects  of  the  National  Bank  system  may  be  summed  up 
as  follows: 

(i)  There  was  no  adequate  provision  for  banking  facilities  in 
the  smaller  places  as  branch  banks  were  not  permitted. 

(2)  Since  by  far  the  greater  part  of  the  public  debt  was  held 
by  the  national  banks  as  a  deposit  for  note  issue,  the  govern- 
ment bonds  acquired  an  artificial  value,  the  virtual  dependence 
of  the  public  credit  on  the  national  banks  militating  against 
both  the  payment  of  the  debt  and  the  substitution  of  some 
better  system  of  security  for  note  issue. 


BANK-NOTES,   PAPER   MONEY,  GOLD  AND  TOTAL    MONETARY 
CIRCULATION    IN  THE    U.S.  FROM    1878  TO  1920 
IN    MILLIONS   OF  DOLLARS 


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C     Total  Monetary  Circulation. 
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1^  1-  cocxjoooooOQOcoaocooo  :r.  C3  ~. OC5C-. c^  J-.  3:  r>  o  c:  c;  —  ■::  c:  Ooooi-i  r-  —  . ^^  ^  __  _-r^^ 

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§  207]  The  Money  Rate  533 

(3)  The  ultimate  redemption  of  the  notes  was  indeed  as- 
sured, but  there  was  no  adequate  provision  for  immediate  and 
daily  redemption.  The  5  per  cent  redemption  fund  at  Wash- 
ington served  only  to  replace  the  soiled  and  mutilated  notes, 
and  accomplished  even  that  object  only  imperfectly.  Not 
only  was  the  expense  great,  but  the  average  life  of  the  outstand- 
ing notes  was  about  two  years,  whereas  it  was  only  about  five 
weeks  under  the  Suffolk  Bank  system,  and  is  correspondingly 
short  in  Canada  and  Europe. 

(4)  The  principal  defect  was  the  complete  lack  of  elasticity. 
In  the  face  of  the  constant  fluctuations  in  the  public  demand 
for  credit  facilities,  the  changes  in  the  price  of  bonds  might 
induce  the  bank  to  sell  rather  than  to  buy  bonds  when  the 
community  needed  more  money;  and  if  by  any  chance  more 
notes  had  been  issued,  the  banks  were  prohibited,  when  the 
need  for  them  was  past,  from  withdrawing  them  at  will.  ,Thus  at 
both  ends  there  was  a  lack  of  flexibility,  necessitating  the  trans- 
mission of  actual  cash  to  and  from  the  communities  in  the 
West  and  South,  causing  violent  fluctuations  in  the  "money- 
rate"  and  upheavals  in  the  stock-market,  and  involving  con- 
stant interference  by  the  government  in  what  ought  to  be  an 
automatically  regulated  mechanism.  Had  the  demand  for 
credit  not  been  met  to  an  overwhelming  degree  by  deposit  cur- 
rency rather  than  bank  notes,  the  situation  would  long  ago  have 
become  intolerable.  As  it  was,  the  embarrassments  were  great, 
and  the  spasmodic  variations  of  the  money  rate  in  Wall  Street 
were,  as  we  have  seen,  utterly  without  parallel  elsewhere. 

207.    The  Money  Rate 

Fluctuations  in  the  money  rate  are  due  to  three  causes,  — 
the  general  rate  of  interest,  the  level  of  prices,  and  the  state  of 
the  money  market  in  the  narrower  sense. 

(i)  The  general  interest  rate  is,  as  we  know,  the  payment 
for  the  use  of  capital  as  a  whole.  The  "money  rate"  or  "dis- 
count rate"  in  the  long  run  follows  the  general  rate  of  interest. 


534  Credit  and  Currency  [§  207 

for  a  relative  plethora  or  dearth  of  capital  ultimately  finds  its 
way  to  the  lending  centres. 

We  must  be  careful,  however,  not  to  confuse  the  demand 
for  money  in  general  with  the  "demand  for  money"  in  the 
Wall  Street  sense.  The  demand  for  money  in  general  is,  as 
we  know,  reflected  in  the  price  level,  because  money  is  needed 
primarily  as  a  medium  of  exchange.  But  the  demand  for 
"money,"  as  reflected  in  the  "money  rate,"  is  primarily  a  de- 
mand for  loanable  funds  or  capital.  A  demand  for  capital  is 
not  necessarily  a  demand  for  money.  The  borrower  of  capi- 
tal may  indeed  get  it  in  the  shape  of  money,  but  the  mere 
fact  that  one  man  rather  than  another  desires  to  control  a  cer- 
tain quantity  of  capital  does  not  alter  the  total  volume  of 
exchanges  or  the  community's  need  for  money.  The  demand 
for  capital  is  reflected  in  the  general  rate  of  interest,  the  demand 
for  money  in  the  general  level  of  prices.  Although,  as  we  shall 
see  below,  there  is  a  minor  correlation  between  interest  rates 
and  prices,  yet  so  far  as  prices  are  primarily  dependent  on  the 
other  factors  which  influence  the  value  of  money,  there  may 
be  high  interest  with  low  prices,  or  low  interest  with  high 
prices.  Interest  depends  on  capital;  prices  depend  on  money: 
interest  depends  at  bottom  on  the  demand  for  the  creation  of 
new  wealth;  prices  depend  on  the  exchange  of  existing  wealth. 

So  far,  therefore,  as  the  fundamental  cause  of  variation  in 
the  "money  rate"  is  the  alteration  in  the  general  rate  of  in- 
terest, the  "money  rate"  depends  on  forces  entirely  distinct 
from  the  demand  or  supply  of  money.  But  while  the  actually 
existing  price  level  cannot  affect  the  rate  of  interest,  the  latter 
may  be  modified  by  changes  in  the  price  level.  We  thus  come 
to  the  second  point. 

(2)  Alterations  in  the  price  level,  that  is,  an  appreciation  or 
depreciation  of  money,  may  exert  a  temporary  change  in  the  rate 
of  interest.  If  a  man  borrows  $1000  during  a  period  of  falling 
prices,  he  will  really  repay  at  the  expiration  of  the  loan  period 
more  than  he  received.     That  is,  in  order  to  return  the  nom- 


§  207]  The  Money  Rate  535 

'  inally  identical  sum  of  $1000  he  must  sell  more  goods  or  work 
i  more  days.  As  interest  is  really  paid  for  capital,  not  money, 
j  and  as  the  prices  of  commodities  have  fallen,  he  is  substan- 
■  tially  paying  back  more  capital  or  commodities  than  he  bor- 
rowed. If,  therefore,  he  is  able  to  foresee  the  falling  prices, 
the  borrower  will  insist  on  securing  a  compensation  by  a  re- 
duction in  the  rate  of  interest,  and  the  lenders  will  be  forced 
by  competition  to  grant  it.  If  competition  and  foresight  are 
perfect  on  both  sides,  the  fall  in  prices  would  be  exactly  offset 
by  the  fall  in  interest,  or  mathematically  speaking  and  allowing 
for  the  compounding  of  interest,  the  rate  of  interest  would  be 
lowered  by  slightly  more  than  the  rate  of  appreciation  of 
money.  It  is  precisely  because  foresight  and  competition  are 
not  perfect  that  the  interest  rate  is  never  exactly  adjusted  to 
this  change  in  the  purchasing  power  of  money,  and  that  varia- 
tions in  the  price  level  are  often  attended  by  periods  of  inflation 
and  depression  in  the  business  world. 

Changes  in  the  price  level  thus  affect  the  rate  of  interest, 
and  the  "rate  of  money"  in  the  Wall  Street  sense  is  hence 
partly  dependent  on  the  "value  of  money"  in  the  broader 
sense.  But  it  must  not  be  overlooked  that  these  changes  are 
merely  incident  to  a  period  of  readjustment  of  prices,  and  that 
as  soon  as  a  new  relatively  permanent  price  level  is  again 
reached,  this  factor  falls  away. 

Since  this  change  in  interest  is  connected  with  an  apprecia- 
tion or  depreciation  of  money,  it  is  clear  that  the  longer  the 
period  which  the  loan  has  to  run,  the  greater  will  be  its  influ- 
ence. It  is,  for  instance,  an  interesting  fact  that  in  a  period  of 
rising  prices,  as  from  1896  to  the  present,  the  rate  on  "time 
money"  in  Wall  Street  tends  to  be  higher  than  on  "call  money." 
While  changes  in  the  price  level  thus  influence  the  rate  of 
interest,  it  must  not  be  forgotten  that  on  the  other  hand  changes 
in  the  rate  of  interest  itself  affect  the  general  price  level.  A  fall 
in  the  rate  of  interest  frequently  tends  to  raise  the  price  level. 
It  might  be  objected  that,  as  Tooke  thought,  since  interest  is  one 


53^  Credit  and  Currency  [§  207 

of  the  elements  in  cost,  low  interest  means  low  prices.  It  must, 
however,  be  remembered  that  lowering  of  the  interest  rate,  and 
therefore  an  increase  of  credit  facilities,  is  apt  to  stimulate  pro- 
duction, and  to  usher  in  a  period  of  rising  prices.  Other  things 
remaining  the  same,  indeed,  low  interest  implies  low  cost  of  pro- 
duction and  low  prices.  But  when  interest  is  lowered,  other 
things  rarely  remain  the  same;  and  it  is  precisely  this  frequent 
concomitant  in  the  "other  things"  that  often  causes  low  interest 
to  be  associated  with  higher  prices.  Such  considerations  as  to 
relation  of  interest  to  prices  reinforce  the  conclusion  reached 
above  (§  193),  that  while  a  change  in  the  supply  of  money 
is  the  chief  cause  of  variations  in  the  price  level,  it  is  not 
the  sole  cause,  and  that  the  rate  of  interest  both  affects,  and 
is  affected  by,  the  general  price  level. 

(3)  While  over  longer  periods  the  money  rate  depends  on 
the  supply  of  capital,  and  while  for  somewhat  shorter  periods 
it  is  influenced  by  the  level  of  prices,  for  still  shorter  periods  it 
is  affected  by  the  temporary  amount  of  loanable  cash  in  the 
money  market.  It  is  this,  and  this  only,  which  the  ordinary 
borrower  of  "call  money"  has  in  mind. 

The  chief  borrowers  of  money  in  Wall  Street  are  those  who 
want  funds  for  meeting  immediate  obligations  or  for  m.argins  in 
the  speculative  market.  With  the  continual  oscillations  in  the 
demand  for  these  loanable  funds,  it  is  obvious  that  a  comparative 
stability  in  the  money  market  can  be  secured  only  by  some  sys- 
tem whereby  the  banks  may  expand  or  contract  their  loans  at 
will  without  fear  of  depleting  their  reserves. 

It  is  patent  that  if  the  demand  for  funds  may  be  met  by  notes 
issued  on  the  general  assets  of  the  banks,  rather  than  by  the 
granting  of  bank  credit  in  the  shape  of  deposits,  not  only  will 
there  be  a  slackening  of  the  pressure  in  the  money  market,  but 
the  demand  for  cash  will  be  met  by  notes  in  lieu  of  a  drain  on 
the  specie  reserve.  The  almost  complete  rigidity  of  note  issue 
in  the  United  States  explains  in  large  part  the  former  violent 
fluctuations  in  the  New  York  money  market. 


§  207]  The  Money  Rate  537 

Rigidity  of  note  issue  is,  however,  not  the  sole  explanation 
of  the  former  startling  conditions  in  Wall  Street.  A  matter  of 
at  least  equal  importance  is  the  nature  of  the  commercial  paper, 
which  retarded  the  replenishment  of  the  reserve. 

If  a  man  wants  to  borrow  money  in  Europe,  he  will  sell  to 
a  bank  his  own  three  months'  bill  drawn  on  some  private 
banker  willing  to  extend  him  credit.  Or  if  he  is  a  merchant 
who  has  sold  goods,  he  will  draw  on  his  customer,  get  his 
banker  to  indorse  the  bill  or  draft,  and  sell  it  to  the  bank  in 
the  same  way.  The  bank  which  purchases  this  banker's  accept- 
ance or  indorsed  paper  can  always  dispose  of  it  to  some  one  else, 
usually  by  having  it  re-discounted  by  one  of  the  large  central 
banks.  In  England  it  is  the  bill-brokers  and  discount  com- 
panies which  do  the  original  discounting,  and  in  turn  secure 
advances  from  the  bank  of  England.  The  result,  however,  is 
the  same.  The  large  banks  keep  most  of  their  funds  invested 
in  these  bills  of  exchange,  and  to  a  large  extent  in  foreign  bills. 
If  the  bills  were  simply  ordinary  merchants'  bills,  they  would 
not  serve  for  international  purposes,  the  drawer  being  generally 
unknown  beyond  local  circles.  But  with  the  acceptance  of  the 
bank,  which  is  known  everywhere,  the  bill  becomes  a  thoroughly 
suitable  means  of  investment  and  exchange.  If  "money 
tightens  "  in  one  country,  the  central  banks  in  the  other  countries 
increase  their  investments  in  bills  of  exchange  of  the  country 
where  the  rate  goes  up,  and  by  purchasing  this  short-time  paper 
tend  to  prevent  the  export  of  specie,  sending  bills  of  exchange 
instead.  In  this  way  not  only  do  the  banks  hold  paper  which 
can  be  almost  immediately  turned  into  cash,  thus  replenishing 
their  reserves,  but  the  credit  of  the  whole  community,  as  repre- 
sented by  the  ordinary  commercial  bills  and  notes,  is  added  to 
the  credit  of  the  bank  as  a  means  of  international  payments. 

In  the  United  States,  on  the  other  hand,  when  a  man  bor- 
rowed money  from  a  bank,  the  latter  kept  the  note  until  it 
fell  due.  It  became  a  dead  or  illiquid  asset.  There  was  no  re- 
discounting  of  domestic  paper,  only  the  foreign-exchange  bills 


538  Credit  and  Currency  [§  208 

being  endorsed  and  resold.  These  long  bills  or  "finance 
bills,"  however,  drawn  by  American  bankers  on  their  foreign 
correspondents  in  foreign  money,  were  necessarily  limited  in 
amount  by  the  extent  of  the  bankers'  credit.  Since  the  Amer- 
ican banks  could  look  upon  their  discounts  of  ordinary  commer- 
cial paper  only  as  illiquid  assets,  and  could  invest  their  funds 
in  the  bill  market,  as  in  Europe,  they  lent  on  call  in  the  stock 
market,  which  thus  attracted  the  surplus  funds  of  the  entire 
country.  Moreover,  since  the  sum  invested  in  call  loans  was 
very  small  compared  with  the  total  amount  of  money  bor- 
rowed throughout  the  country,  it  follows  that  a  sudden  change 
in  the  supply  of  loanable  funds  was  far  more  acutely  felt 
in  this  small  field  than  would  be  the  case  if  spread  over  the 
larger  area.  In  Europe,  if  money  tightens,  it  takes  the  form  of 
a  slight  rise  in  the  rate  of  discount  on  practically  all  the  com- 
mercial paper  of  the  country;  in  America,  if  money  tightened, 
the  rate  rose  violently  on  call  loans. 

The  situation  was  further  aggravated  in  the  United  States  by 
the  Independent  Treasury  system. 

The  revenues  were  allowed  to  accumulate  in  the  Treasury  until 
the  semi-annual  payments  of  interest  on  the  debt  arrived,  thus 
taking  out  of  the  money  market  the  funds  which  might  other- 
wise in  the  banks  have  served  as  the  basis  of  large  credit  trans- 
actions, and  then  just  as  abruptly  throwing  the  funds  into  the 
market.  Not  only  had  this  practice  helped  to  create  a  fre- 
quent stringency  by  locking  up  badly  needed  funds,  but  it  had 
become  customary  in  time  of  urgency  to  appeal  to  the  gov- 
ernment to  "ease  the  market"  by  special  measures  of  relief, 
putting  on  the  Secretary  of  the  Treasury  a  burden  of  a  most 
onerous  and  responsible  character. 

208.  The  Federal  Reserve  Act  of  1913 

A  comprehensive  scheme  of  banking  reform  in  the  United 
States  would  therefore  include  at  least  four  points:  modification 
of  the  independent  treasury  system;  a  reform  in  discount  meth- 


§  2o8]        Federal  Reserve  Act  of  191  3  530 

ods;  a  greater  flexibility  of  note  issues;  and  above  all,  as  we 
pointed  out  in  the  last  chapter,  a  centrahzation  of  reserves. 

An  attempt  to  remedy  some  of  the  evils  was  made  by  the 
Aldrich-Vreeland  law  of  1908,  which  provided  for  an  emergency 
currency,  the  use  of  notes  on  commercial  assets,  the  formation 
of  national  currency  associations  and  the  creation  of  a  com- 
mission. The  machinery,  however,  was  cumbrous,  and  the 
law  was  of  a  temporary  character — ^  to  expire  in  191 5.  No 
use  in  fact  was  made  of  it,  except  during  the  war  scare  of 
1914.  The  monetary  commission  reported  in  191 1  and  its 
fundamental  recommendations,  with  a  few  not  unimportant 
alterations,  were  embodied  in  the  act  of  December  23,  1913. 
The  principal  features  of  the  law  are  as  follows: 

I.  Centralization  of  reserves.  The  country  is  divided  into 
twelve  regions  with  a  federal  reserve  bank  in  each.  Every 
national  bank  must,  and  every  state  bank  or  trust  company 
may,  contribute  to  the  capital  of  the  federal  reserve  bank  in  the 
district;  and  since  1917  every  member  bank  must  keep  its  entire 
legal  reserve  in  the  federal  reserve  bank.  Each  federal  reserve 
bank  must  have  nine  directors,  six  elected  to  represent  the 
member  banks  and  the  business  interests,  respectively,  and 
three  appointed  by  the  Federal  Reserve  Board.  The  federal 
reserve  banks,  which  may  open  branches  anywhere  within  the 
district,  act  as  agents  of  the  United  States  government  and  may 
keep  the  government  funds.  Their  business  is  limited  to  trans- 
actions with  member  banks  and  with  the  government,  except 
that  they  may  deal  in  commercial  biUs,  bills  of  exchange,  gold 
coin  and  buUion,  government  bonds  and  notes.  They  must 
keep  a  reserve  of  35%  against  deposits.  One-half  of  their  earn- 
ings over  6%  goes  into  a  surplus  fund,  until  it  amounts  to  at 
least  40%  of  the  capital  stock,  and  the  other  half  goes  to  the 
government. 

A  Federal  Reserve  Board  of  seven  members,  appointed  by  the 
President,  exercises  a  general  supervision  over  the  reserve  banks. 
It  designates  the  chairman  and  deputy  chairman  of  the  board  of 


540  Credit  and  Currency  [§  208 

directors  of  each  bank,  it  may  suspend  or  remove  any  officer  or 
director,  it  may  suspend  any  reserve  requirements  of  the  reserve 
banks,  it  may  readjust  the  federal  reserve  districts,  it  may  fix  the 
rate  of  discount  to  be  charged,  it  may  require  any  federal  reserve 
bank  to  discount  for  another,  and  finally  what  is  most  important, 
it  may  determine  the  character  of  paper  elegible  to  discount.  A 
Federal  Advisory  Council  of  twelve  members,  elected  by  the 
reserve  banks,  is  invested  with  advisory  functions,  but  the  real 
power  lies  in  the  Federal  Reserve  Board.  While  the  monetary 
commission  bill  provided  for  out-and-out  centraUzation,  the  law 
of  1913  provides  nominally  for  a  federalization  of  banking 
reserves,  but  secures  to  all  intents  and  purposes  the  essentials  of 
an  actual  centralization  of  reserves. 

2.  The  discount  of  commercial  paper.  Every  member  bank  is 
authorized  to  accept  (i)  ninety  day  domestic  paper  arising  out 
of  commercial  transactions  not  including  paper  issued  for  carry- 
ing securities  (except  those  of  the  U.  S.),  but  including  six  months 
paper  issued  for  agricultural  purposes  or  based  on  live  stock; 
(2)  6  months  foreign  commercial  biUs;  and  (3)  3  months  paper 
drawn  abroad  in  order  to  furnish  dollar  exchange.  All  such  paper 
when  endorsed  by  a  member  bank  may  be  rediscounted  by  a 
federal  reserve  bank  which  since  191 6  may  also  loan  on  short  time 
(up  to  15  days)  collateral  notes.  Banks  not  in  a  central  reserve 
city  may  loan  up  to  5  years  on  neighboring  farm  lands  up  to 
50%  of  their  value.  The  federal  reserve  bank  may  also  carry  on 
so-called  "open  market"  operations,  that  is,  deal  directly  in 
paper  eligible  for  rediscount  even  without  the  endorsement  of  a 
member  bank.  Finally,  every  federal  reserve  bank  may  receive 
and  transfer  on  demand  funds  and  balances  of  member  banks 
or  other  reserve  banks,  the  Federal  Reserve  Board  having  the 
power  to  require  every  federal  reserve  bank  to  exercise  the 
functions  of  a  clearing  house  for  its  member  banks.  Thus,  by 
one  blow,  as  it  were,  the  character  of  our  credit  facilities  was 
completely  changed. 

J.   Note  issue.    The  law  transfers  the  right  of  note  issue  by 


§  2o8]       Federal  Reserve  Act  of  191  3         541 

gradual  steps  to  the  federal  reserve  banks  alone.  The  new 
federal  reserve  notes,  instead  of  being  secured  by  bonds,  are  to 
be  issued  on  the  basis  of  discounted  bills  and  may  be  put  out  to 
any  amount,  with  the  sole  limitation  that  a  40  per  cent  reserve 
is  to  be  kept  in  gold.  This  limit  may  be  suspended  by  the 
Federal  Reserve  Board,  but  in  that  case  a  graduated  tax  of  i 
per  cent  is  to  be  imposed;  and  if  the  reserve  falls  below  32 
per  cent  a  farther  tax  of  i|  per  cent  is  to  be  imposed  for  every 
2^  per  cent  deficiency  of  reserve  below  32^  per  cent.  This 
tax,  moreover,  is  to  be  added  to  the  rate  of  discount  as  fixed  by 
the  Federal  Reserve  Board.  In  order,  however,  to  prevent  the 
sudden  throwing  upon  the  market  of  the  2  per  cent  bonds  which 
have  hitherto  served  as  a  basis  of  the  national  bank  circulation, 
it  is  provided  that  not  more  than  $25,000,000  a  year  of  the  2's 
shall  be  turned  over  by  the  national  banks  to  the  reserve  banks. 
The  federal  reserve  bank  may  also  issue  its  own  bank  notes 
on  the  same  bond  security  as  the  old  national  bank  notes;  but 
if  it  prefers  not  to  do  so,  it  may  exchange  one-half  of  these  2's 
for  one  year  gold  notes  and  the  other  half  for  3's,  wdthout  the 
circulation  privilege.  The  obligation  to  purchase  the  one-year 
gold  notes  at  the  discretion  of  the  Secretary  of  the  Treasury 
may  continue  for  thirty  years,  so  that  it  will  be  at  least  a  quarter 
of  a  century  before  the  present  national  banknotes  entirely 
disappear.  In  ]\Iay,  191Q,  there  were  in  circulation  2,521  millions 
of  federal  reserve  notes  and  152  millions  of  federal  reserve  bank- 
notes, while  the  national  banknotes  had  fallen  to  653  millions. 

The  advantages  of  the  new  system  may  be  summarized  as 
follows: 

I.  Mobilization  of  credit.  The  substitution  of  bankable 
commercial  paper  in  the  place  of  bonds  not  only  insures  a  flex- 
ibility of  credit,  which  was  hitherto  lacking,  but  greatly  en- 
larges the  field  of  banking  operations.  The  banks,  instead  of 
being  restricted  to  call  loans  on  the  stock  exchange  and  to 
investment  in  illiquid  assets  which  repose  quietly  in  their 
portfolios,  now  enjoy  an  opportunity  of  extending  their  opera- 


542  Credit  and  Currency  [§  208 

tions  to  a  far  wider  field  of  business  activity,  and  of  immediately 
converting  the  commercial  paper  into  cash,  if  need  be.  Instead 
of  remaining  immobile,  the  assets  of  the  American  banks  at  once 
become  flexible  and  mobilized. 

2.  Insurance  against  disaster.  Under  the  system  hitherto, 
at  the  least  sign  of  trouble,  each  banker  sat  tight  on  his  own 
little  reserve  and  became  suspicious  of  his  neighbor.  Under 
the  new  system,  he  has  a  great  part  of  the  reserve  of  all  the 
member  banks  to  fall  back  upon.  Instead  of  jealousy,  there 
is  co-operation;  instead  of  fear,  there  is  confidence.  Just  as 
the  individual  householder  uses  the  fire  insurance  company 
against  the  risk  of  conflagration,  so  the  individual  bank  uses 
the  federal  reserve  banks  as  its  insurance  against  catastrophe. 
Without  the  new  system  it  would  have  been  almost  impossible 
to  finance  the  Great  War. 

3.  Democratization  of  facilities.  The  small  bank  was  hitherto 
dependent  upon  its  own  little  capital  and  insignificant  credit. 
Under  the  new  system  its  assets  are  no  longer  locked  up,  but  it 
can  at  once  rediscount  its  paper  at  the  federal  reserve  bank  and 
it  is  thus  able  largely  to  increase  its  facilities.  Moreover  checks 
are  now  collected  without  discount  and  transfers  of  money  are 
made  without  actual  shipment. 

4.  Internationalization  of  business  risks.  Until  1914,  if  the 
credit  situation  differed  in  this  country  from  that  abroad,  we 
were  virtuaUy  prevented  from  taking  prompt  advantage  of  the 
difference.  In  the  crisis  of  1907,  for  instance,  when  the  replenish- 
ment of  our  gold  supply  became  necessary,  it  was  impossible 
to  secure  a  large  remittance  from  France,  although  in  a  similar 
emergency  a  decade  previous  England  was  in  this  way  able  to 
ward  off  disaster.  Under  the  new  system,  the  United  States 
has  entered  the  concert  of  nations  and  has  begun  to  take  advan- 
tage of  reciprocal  facilities  through  its  power  to  deal  in  foreign 
commercial  bills  and  to  conclude  loans  of  gold.  Just  as  the 
federal  reserve  banks,  in  their  national  transactions,  have 
decreased  the  risks  of  local  banks,  so  in  their  international 


§  209]  Credit  and  Crises  543 

transactions  they  have  diminished   the  risks  of  all  banks.     In 
the  Great  War  this  aid  has  been  invaluable. 

5.  Participation  in  world-wide  profits.  Hitherto,  when  an 
American  had  commercial  dealings  with  South  America  or 
Asia,  he  paid  by  bills  drawn,  not  on  New  York,  but  on  London. 
London  has  been  for  over  a  century  the  world's  financial 
center,  and  the  banking  commissions  of  the  world's  business 
amount  to  many  millions  a  year.  With  the  prodigious  foreign 
trade  of  the  United  States  there  is  no  reason  why  a  substantial 
,share  of  these  millions  should  not  come  to  this  country.  Stimu- 
lated by  the  Great  War,  so-called  dollar  exchange  has  been  de- 
veloping fast  since  191 5.  The  American  banker  of  the  future 
will  have  a  wider  horizon  and  a  broader  opportunity,  and  if 
he  avails  himself  of  his  opportunity  there  is  no  reason  why  the 
world's  financial  center  should  not  ultimately  be  shifted  from 
England  to  the  United  States,  just  as  at  the  close  of  the  eigh- 
teenth century  it  was  shifted  from  Holland  to  England. 

209.   Credit  and  Crises 

Crises  are  sometimes  classified  as  financial  and  commercial 
or  industrial  crises.  In  point  of  fact,  since  the  bank  is  the 
nerve  center  of  modern  business,  all  crises  are  financial  crises. 
What  is  meant  by  the  alleged  distinction  is  that  in  some 
cases  attention  is  directed  to  the  immediate  occasion  of  the 
crisis  in  the  shape  of  bad  banking  or  bad  currency  or  stock- 
exchange  speculation,  while  in  other  cases  regard  is  paid 
to  the  underlying  cause  in  the  general  conditions  of  busi- 
ness. 

Crises  are  essentially  modern  phenomena.  They  are  a 
product  of  the  new  system  of  business  enterprise,  built  upon 
capital  and  credit.  Sporadic  instances  are  found  in  earlier 
centuries,  but  it  is  only  since  the  domination  of  the  factory 
system  that  crises  have  become  a  regular  occurrence.  During 
the  nineteenth  century  a  certain  rough  periodicity  may  be  ob- 
served in  the  world  crises  transmitted  from  country  to  country. 


544  Credit  and  Currency  [§  209 

The  important  ones  were  those  of  1825,  1837,  1847,  1857,  1873, 
1884,  1890,  1893,  1900,  1907  and  the  war  panic  of  1914. 

The  surface  facts  of  the  phenomenon  are  famihar.  There  is 
a  rhythmic  movement  in  all  modern  business.  At  a  certain 
period  "times  are  good,"  prices  rise,  all  manner  of  new  enter- 
prises are  launched,  bank  facilities  are  extended,  and  prosperity 
is  found  on  every  side.  Then  in  the  height  of  this  period  of 
exaltation,  something  happens  to  disturb  confidence.  A  chance 
occurrence,  a  mere  rumor,  may  suffice.  Some  bank  or  financial 
institution  considers  its  credit  too  heavily  engaged  or  suspects 
that  the  collateral  deposited  with  it  for  loans  is  inadequate. 
Just  at  the  flood  of  the  tide,  when  new  demands  are  constantly 
being  made,  it  finds  itself  unable  or  unwilling  to  respond.  Its 
refusal  intensifies  the  feeling  of  insecurity,  and  with  the  inability 
of  some  important  concern  to  meet  its  obligations  a  failure 
occurs.  At  once  every  other  institution  takes  in  sail,  and  en- 
deavors to  realize  on  its  collateral;  that  is,  creditors  demand 
payment  and  debtors,  in  their  frantic  effort  to  pay,  sacrifice 
securities,  often  in  vain.  Prices  fall  with  a  thud,  failure  suc- 
ceeds failure,  and  the  panic  is  complete,  carrying  in  its  wake 
loss  and  suffering  to  every  part  of  the  economic  community. 
Then  follows  a  period  of  more  or  less  long  continued  depres- 
sion, low  prices  and  "hard  times"  with  chronic  unemploy- 
ment and  low  wages,  until  gradually  the  wave  of  prosperity 
again  sets  in,  and  the  process  repeats  itself. 

According  to  the  point  of  view  from  which  the  subject  is 
approached,  the  explanation  usually  given  is  that  of  overpro- 
duction or  underconsumption.  The  theory  of  overproduction 
states,  not  that  there  is  a  general  glut  of  commodities  — 
for  that  would  imply  that  there  can  be  too  much  wealth, 
which  is  absurd  —  but  that  there  are  more  goods  than  can 
be  sold  at  a  profitable  price.  Whether  this  overproduction 
starts  with  particular  commodities  and  becomes  relative  over- 
production or  extends  to  all  commodities  and  becomes  general 
overproduction  is   immaterial.      The    remedy   for    crises    then 


§  209]  Credit  and  Crises  545 

would  be  to  produce  less,  either  of  certain  things  or  of  all 
things.  On  the  other  hand,  the  theory  of  underconsumption 
emphasizes  the  inability  of  the  consumer  to  pay  enough  to 
keep  the  industries  going.  Were  the  consumer  to  save  less  and 
to  spend  more,  crises  might  be  averted. 

The  true  explanation  of  crises  is  somewhat  dififerent.  The 
whole  problem  is  one  of  capitalization.  All  investment  values 
are,  as  we  know  (§  117),  the  result  of  the  capitaHzation  of  esti- 
mated earnings.  The  factory  system  is  one  of  mass  production 
for  the  anticipated  market,  not  of  production  to  order  for  a 
given  market.  Even  if  it  be  said  that  modern  steel  mills  only 
fill  definite  orders,  it  is  none  the  less  true  that  immense  plants 
are  constantly  being  erected  in  the  expectation  that  orders  will  be 
received  in  the  future.  A  period  of  good  times  may  be  initiated 
by  large  orders  for  some  particular  business,  —  due,  for  instance, 
to  a  new  navy  programme,  to  internal  improvements,  to  a  war 
or  to  any  other  large  demand.  Prices  rise  in  that  business,  pro- 
duction increases,  the  movement  spreads  to  other  lines,  and  the 
new  enterprises  are  financed  by  loans  from  the  banks  or  by  the 
sale  of  securities  on  a  capitalization  proportionate  to  the  antici- 
pated earnings.  The  psychological  character  of  these  credit 
transactions  is  such,  as  we  have  seen,  that  the  capitalization  will 
inevitably  be  put  too  high.  The  hoped-for  earnings  do  not 
come  in  an  amount  sufficient  to  justify  the  investment.  It 
becomes  necessary  to  reduce  the  capitalization  to  its  true 
market  value  on  the  basis  of  actual  earnings.  This  process  of 
readjustment  of  overcapitalized  values  necessarily  involves  loss; 
but  readjustment  there  must  be.  If  the  realization  of  its  neces- 
sity is  sudden,  we  have  a  crisis  or  panic;  if  it  can  be  brought 
about  gradually,  we  have  a  process  of  liquidation.  In  any  event 
there  follows  a  period  of  depression,  which  must  continue  until 
the  readjustment  of  capitalization  to  actual  earning  capacity  has 
become  complete. 

Crises  therefore  are  not  necessarily  a  result  of  increased  tech- 
nical production.  The  important  point  is  not  production,  but 
35 


54^  Credit  and  Currency  [§  209 

capitalization.  The  crisis  of  1837  was  due  to  the  overcapi- 
talization of  land  values;  the  liquidation  of  1903  to  the  over- 
capitalization of  trust  values.  In  neither  case  was  there  any- 
increased  production.  Overproduction  may  indeed  accompany 
overcapitalization,  but  the  emphasis  is  to  be  put  on  the  discrep- 
ancy between  the  investment  and  the  returns.  In  this  sense 
all  crises  and  depressions  are  credit  phenomena. 

Inasmuch  as  modern  business  enterprise  is  based  on  credit, 
it  is  obvious  that  even  an  ideal  banking  and  currency  system 
cannot  in  itself  avert  crises.  It  may  mitigate  the  evils  by  pro- 
viding great  elasticity  and  preventing  the  shock  of  a  sudden 
panic;  but  the  ultimate  readjustment  must  come.  More,  how- 
ever, is  to  be  hoped  for  from  the  newer  tendencies  in  the  organi- 
zation of  economic  life.  With  the  growth  of  the  business  unit 
and  the  integration  of  modern  industry  it  is  possible  to  dis- 
cern the  beginnings  of  a  more  equable  and  better  regulated 
method  of  enterprise  and  capital  investment.  With  every  decade 
panics  are  visibly  becoming  less  severe.  Like  some  of  the  other 
economic  evils  of  the  nineteenth  century  discussed  in  the  pre- 
vious book,  financial  crises  seem  to  be  peculiar  to  the  infancy 
of  the  factory  system.  Here,  as  elsewhere,  the  task  of  the  future 
consists  in  retaining  the  advantages  of  a  healthy  competition 
while  doing  away  with  its  abuses.  Rhythmic  oscillations  in 
prosperity  and  adversity  will  no  doubt  continue  to  occur  in  busi- 
ness life  as  elsewhere.  But  with  a  better  grasp  of  the  principles 
of  credit,  with  an  increasing  responsibility  of  promoters  to  in- 
vestors, with  a  more  stable  demand  on  the  part  of  the  wage- 
earning  consumers,  and  above  all  with  the  more  efficient 
regulations  of  production  through  the  newer  forms  of  business 
enterprise  we  may  reasonably  look  forward  to  a  fairly  successful 
adjustment  of  capitalization  to  real  earning  capacity  and  to  a 
more  complete  adaptation  of  the  present  to  the  future.  When 
this  stage  is  reached,  credit  will  be  shorn  of  its  lurking  dangers 
and  will  stand  forth  in  its  true  light  as  an  unmixed  benefit  to 
solid  economic  progress. 


§  209§]      The  Federal  Farm  Loan  Act      546* 

209^.  The  Federal  Farm  Loan  Act 

The  discussion  of  credit  would  not  be  complete  without  a 
word  as  to  agricultural  credit.  The  granting  of  better  facilities 
for  rural  credit  has  of  recent  years  engaged  the  earnest  attention 
of  the  American  thinkers  and  statesmen.  The  movement  has 
culminated  in  the  passage, ini9i6, of  the  Federal  Farm  Loan  Act. 

The  law  provides  for  an  organization  patterned  on  the 
federal  reserve  system.  The  country  is  divided  into  twelve 
districts,  each  with  a  Farm  Land  Bank  and  under  the  general 
supervision  of  the  Federal  Farm  Loan  Board  at  Washington. 
The  Farm  Loan  Board  is  composed  of  five  members  with  the 
Farm  Loan  Commissioner  at  the  head  and  represented  in  each 
district  by  a  Registrar. 

Any  ten  or  more  persons  who  own  land  and  desire  to  borrow 
on  the  land  may  form  a  National  Farm  Loan  Association,  mth 
a  board  of  at  least  five  directors  and  a  loan  committee  of  three 
members.  The  capital  stock  of  these  associations  is  in  shares 
of  $5  each,  and  every  applicant  for  a  loan  must  take  stock  to  the 
extent  of  five  per  cent  of  the  amount  of  the  loan,  the  stock  to  be 
retired  when  the  loan  is  paid  off.  The  applications  for  a  loan 
are  forwarded  to  the  Farm  Land  Bank  of  the  district,  or  to  its 
branches  which  may  be  approved  by  the  Farm  Loan  Board. 
The  Land  Bank  must  then  have  the  land  appraised  by  its  own 
ofiicials  and  may  make  a  loan  not  to  exceed  fifty  per  cent  of  the 
value  of  the  land  mortgaged  and  twenty  per  cent  of  the  value 
of  the  insured  improvements.  No  loan  can  be  less  than  $ioo 
or  more  than  $10,000. 

The  Farm  Loan  Associations  are  required  to  endorse  and  to 
become  responsible  for,  the  payment  of  the  mortgages.  The  rate 
of  interest  on  loans  cannot  exceed  six  per  cent,  exclusive  of  pay- 
ments for  the  amortization  of  the  loan,  which  must  be  efi'ected 
in  not  less  than  five,  or  more  than  forty,  years. 

The  capital  of  the  Farm  Land  Banks  is  expected  to  be  owned 
by  the  National  Farm  Loan  Associations.    The  stock  may,  how- 


54^**     The  Federal  Farm  Loan  Act      [§  209I 

ever,  also  be  subscribed  by  the  public.  If  the  stock  is  not  sub- 
scribed by  either  the  association  or  the  general  pubHc  it  is  to  be 
paid  in  by  the  national  government.  No  stock  shall  have  any 
voting  rights  except  shares  owned  by  the  government  and  by 
the  Farm  Loan  Associations.  Stock  owned  by  the  government, 
however,  is  to  receive  no  dividends. 

The  Land  Banks  may  apply  to  the  Farm  Loan  Board  for  per- 
mission to  issue  bonds  secured  by  these  mortgages.  The  rate 
of  interest  on  these  farm  loan  bonds  cannot  exceed  five  per 
cent.  Every  Land  Bank  is  primarily  responsible  for  the  bonds 
issued  by  it;  but  in  case  of  default  the  issues  of  each  bank  are 
guaranteed  by  all  the  other  banks.  The  Land  Banks  and  the 
Farm  Loan  Associations  are  exempt  from  all  taxation  except 
upon  their  real  estate. 

Provision  is  also  made  for  Joint  Stock  Land  Banks,  the  capital 
of  which  must  be  provided  by  private  parties.  They  also  may 
issue  bonds,  but  they  are  not  subject  to  the  conditions  placed 
upon  the  Federal  Land  Banks  as  to  the  purposes  for  which  the 
money  must  be  used,  as  to  amortization  or  as  to  occupation  of 
the  land  by  the  owner. 

The  banks  of  both  kinds  may  be  designated  as  depositaries 
of  pubhc  money  and  as  financial  agents  of  the  government.  In 
other  words  they  may  be  employed  to  sell  government  bonds. 
The  deposits  that  may  be  made  by  the  government  for  the  tem- 
porary use  of  the  Land  Banks  are  limited  to  six  million  dollars. 

The  net  effect  of  the  whole  scheme  is  to  afford  farm  loans  at 
a  moderate  rate.  All  profits  accrue  to  the  borrowers  and  thus 
serve  to  reduce  the  rate  of  interest.  Moreover,  the  expenses  of 
the  Farm  Loan  Board  are  paid  by  the  government  and  not,  as 
in  the  case  of  the  federal  reserve  system,  by  the  member  banks. 
This,  together  with  the  exemption  from  taxation,  operates  still 
further  to  reduce  the  charge  for  farm  loans.  The  justification 
for  these  favors  is  naturally  to  be  found  in  the  supreme  impor- 
tance of  a  prosperous  population  of  small  farmers  to  the  American 
community.  The  Farm  Loan  Act  thus  furnishes  a  unique  ex- 
ample of  practical  co-operation  and  of  government  aid. 


CHAPTER  XXXII 

INTERNATIONAL  TRADE 
210.  References 

J.  E.  Cairnes,  Principles  (1874),  part  3;  C.  F.  Bastable,  Theory  of  In- 
ternational Trade  (1903);  G.  Clare,  The  ABC  of  the  Foreign  Exchanges 
(1893);  A.  W.  IMargraff,  International  Exchange  (1903);  W.  F.  Spalding, 
Foreign  Exchange  and  Foreign  Bills  (191 5);  H.  G.  Brown,  International 
Trade  and  Foreign  Exchange  (1915) ;  G.  J.  Goschen,  Theory  of  the  Foreign 
Exchanges  (1866);  F.  Y.  Edgeworth,  Theory  of  International  Values 
(Econ.  Jour.,  IV,  1893);  A.  C.  Pigou,  Protective  and  Preferential  Import 
Duties  (1906);  R.  Giffen,  The  Use  of  Export  and  Import  Statistics,  in  his 
Inquiries  (1904);  A.  C.  Whitaker,  Foreign  Exchange  (1919);  F.  W 
Taussig,  Tariff  History  of  the  United  States  (1914),  Soine  Aspects  of  the 
Tariff  Question  (1915)  and  Free  Trade,  the  Tariff  and  Reciprocity  (1910); 
E.  Stanwood,  American  Tariff  Controversies  in  the  Nineteenth  Century 
(1903);  W.  J.  Ashley,  Tariff  Problem  (1904);  L.  Porritt,  Sixty  Years  of 
Protection  in  Canada  (1908);  H.  Withers,  Money  Changing  (1913); 
C.  K.  Hobson,  Tlie  Export  of  Capital  (1914). 

211.   Basis  of  International  Trade 

It  was  long  supposed  that  the  principles  of  international 
trade  dififered  from  those  of  internal  commerce,  in  that  the 
former  was  subject  to  the  law  of  comparative  cost  and  de- 
pendent on  the  existence  of  non-competing  industrial  groups. 
We  now  know  that  the  law  of  comparative  costs  or  of  recipro- 
cal demand  is  the  explanation  of  all  exchange  (§  95),  and 
that  non-competing  industrial  groups  are  found  in  internal  in- 
dustry as  well  (§  177).  Trade  takes  place  between  nations 
as  between  individuals,  because  of  relative,  not  of  absolute, 
advantages.  One  country  A  may  produce  a  certain  class  of 
commodities  at  a  lower  cost  than  B  and  nevertheless  find  it 
profitable  to  import  them,  because  A  can  produce  other  com- 
modities still  more  cheaply  than  B.  It  will  be  advantageous 
for  A  to  export  the  second  class  of  commodities  and  to  receive 

547 


548 


International  Trade  [§  211 


pay  for  them  by  importing  the  iirst.  The  entire  body  of  eco- 
nomic doctrine  elaborated  by  Ricardo,  Mill  and  Cairnes,  tend- 
ing to  show  that  international  trade  rests  on  the  equation  of 
reciprocal  demand  and  comparative  cost,  has  no  distinctive 
application  to  international  exchange  and  therefore  calls  for 
no  special  discussion  here. 

In  only  one  respect,  albeit  a  most  important  one,  does  ex- 
change between  nations  differ  from  that  between  individuals. 
In  both  cases  indeed  a  surplus  enjoyment  is  sought.  The 
individual  endeavors  to  obtain  this  in  the  form  of  money, 
because  the  more  money  he  has  the  richer  he  is.  The  nation, 
however,  cannot  follow  this  course.  The  mere  accumulation  of 
money  is  bootless.  A  nation  can  do  only  one  of  three  things 
with  its  funds,  (i)  The  money  may  be  hoarded.  In  mod- 
ern times,  however,  this  is  not  done,  because  pubhc  credit  is  a 
cheap  substitute  for  government  hoards;  and  because  after  a 
relatively  insignificant  point  has  been  reached,  a  reserve  of 
coin,  whether  for  currency  or  for  banking  purposes,  becomes 
unnecessary  or  even  wasteful.  (2)  The  money  may  be  spent 
at  once.  If  expended  abroad,  the  purchases  must  come  in  as 
imports;  if  spent  at  home,  it  diverts  to  profitable  home  con- 
sumption what  would  otherwise  have  been  available  for  exports. 
In  the  one  case  imports  are  increased,  in  the  other  exports 
are  lessened.  (3)  The  money  may  enter  general  circulation. 
The  necessary  result  of  this  is  to  raise  the  level  of  dom.estic 
prices,  to  check  exports  and  to  augment  imports,  until  the 
money  flows  out  again  and  the  international  level  of  prices  is 
restored. 

It  is  for  this  reason  that  imports  must  in  the  long  run  pay  for 
exports,  and  vice  versa.  This  does  not  mean  that  at  any  given 
time  imports  and  exports  must  be  equal.  The  state  of  recip- 
rocal liabilities  between  one  country  and  the  outside  world 
may  be  such  as  to  lead  to  a  permanent  excess  of  either  exports 
or  imports.  It  might  be  supposed  that  an  excess  of  imports 
would  represent  profits  on  the  transaction.     One  nation  A  may 


§  2ii]  Basis  of  Trade  549 

sell  its  goods  abroad  at  an  advantage,  and  may  elect  to  bring 
in  its  gains  in  the  shape  of  additional  goods,  which  would  then 
constitute  a  surplus  of  imports.  Ordinarily,  however,  the  other 
nation  B  will  do  the  same,  so  that  on  the  second  transaction 
there  will  be  a  surplus  of  exports  from  A  to  B.  Assuming  the 
gains  to  be  equal,  these  will  balance  each  other.  Thus,  while 
both  parties  secure  a  surplus  of  satisfaction,  there  will  be  no 
excess  of  exports  or  imports. 

On  the  other  hand,  it  must  be  remembered  that  goods  are  ex- 
changed not  only  for  goods,  but  for  services.  If  a  country  per- 
forms valuable  services  for  others,  they  must  be  remunerated, 
and  the  payment  will  ultimately  assume  the  form  of  extra  im- 
ports. England,  for  example,  at  the  present  time  does  at  least 
three  things  for  the  rest  of  the  world,  (i)  The  British  merchant 
marine  is  so  immense  that  a  large  amount  of  trade  between 
other  countries  is  carried  on  in  British  bottoms.  The  freights 
paid  by  foreigners  go  to  swell  British  imports.  (2)  The  British 
system  of  marine  insurance  is  so  much  more  admirably  organ- 
ized than  that  of  other  countries,  that  a  great  part  of  the  ships 
and  cargoes  of  other  countries  are  insured  by  British  firms. 
The  profits  of  this  business  also  increase  the  volume  of  im- 
ports. (3)  International  debts,  as  we  shall  see  in  §  212,  are 
liquidated  largely  by  the  purchase  of  bills  of  exchange  on 
London.  The  commissions  to  the  London  bankers  again 
reach  England  in  the  form  of  imports.  Freights,  insurance 
profits,  and  commissions  together  amount  to  a  few  hundred 
millions  of  dollars  a  year.  Finally,  it  must  not  be  forgotten 
that  in  modern  times  international  transactions  take  place  in 
securities  as  well  as  commodities.  If  a  nation  has  invested 
heavily  in  foreign  bonds,  government  or  industrial,  the  interest 
on  the  invested  capital  will  accrue  in  the  shape  of  imports. 
Another  portion  of  the  vast  surplus  of  British  imports  is  as- 
cribable  to  this  fact. 

The  so-called  favorable  balance  of  trade  is  for  several  reasons 
a  delusion.     It  is  difiicult  to  state  with  accuracy  the  exact  rela- 


S50 


International  Trade 


[§  211 


tion  between  exports  and  imports:  for  (a)  where  there  is  a 
long  frontier  or  seacoast,  it  is  weUnigh  impossible  to  include 
everything;  (b)  even  where  everything  is  included,  there  is  no 
assurance  against  fraud  or  undervaluation;  and  (c)  there  is 
no  uniformity  as  to  whether  values  should  be  calculated  at  the 
place  of  export  or  of  import,  that  is,  whether  cost  of  transpor- 
tation should  be  included.  The  statistics  themselves  are  there- 
fore of  dubious  value.  Even  if  the  balance  could  be  accurately 
ascertained,  however,  it  would  not  tell  us  anything  of  impor- 
tance. Some  prosperous  countries,  like  England,  Germany 
and  France,  habitually  import  far  more  than  they  export; 
some  poor  countries,  like  Peru,  Siam  and  San  Domingo,  habitu- 
ally export  more  than  they  import.  The  following  table  will 
show  the  relation  of  exports  to  imports  in  the  principal  countries 
of  the  world: 


THE   RELATION   OF   EXPORTS   TO   IMPORTS   IN 
THE   PRINCIPAL   COUNTRIES 


Excess  of 

Year 

Imports 

Exports 

Exports  ("t") 
or  Imports  ( — ) 

Dollars. 

DoUars. 

Dollars. 

United  Kingdom 

1909 

3,040,127,000 

1,840,415,000 

—1,199,712,000 

Germany .     .     . 

1909 

2,027,790,000 

1,568,954,000 

— 458,836,000 

Netherlands 

1909 

1,261,235,000 

986,810,000 

—274,425,000 

Italy     .     .     .     . 

1908-9 

600,560,000 

360,310,000 

— 240,250,000 

Belgium   .     .     . 

1909 

7'4.933>ooo 

542,277,000 

— 172,656,000 

France      ,     .     . 

1909 

1,205,500,000 

1,103,584,000 

— 101,916,000 

Switzerland  .     • 

1909 

309,213,000 

211,849,000 

— 97,364,000 

United  States   . 

1909-10 

1,647,554,000 

1,774,824,000 

-f- 1 27, 270,000 

Brazil  .... 

1909 

179,690,000 

308,332,000 

4-128,642,000 

British  India     . 

I 90S-9 

417,799,000 

486,079,000 

4-68,280,000 

Russia      .     .     . 

1908 

470,020,000 

514,099,000 

-1-44,079,000 

Egypt.     .     .     . 

1909 

109,885,000 

128,895.000 

4-19,010,000 

Siam    .... 

1909-10 

25,663,000 

37,705,000 

4-12,042,000 

Haiti    .     .     .     . 

190S-9 

5,881,000 

1 1 ,008,000 

4-5,127,000 

Guatemala    .     . 

1909 

5,251,000 

10,079,000 

-h4,828,ooo 

EXPORTS  AND  IMPORTS  OF  MERCHANDISE, 
UNITED   STATES 


Years 
ending 
June  30 


1872 
1873 
1874 
1875 
1876 

1877 
1878 

1879 
1880 
188I 
1882 
1883 
1884 
1885 
1886 
1887 
1888 
1889 
1890 
189I 
1892 

1893 
1894 

1895 
1896 

1897 
1898 
1899 
1900 
I9OI 
1902 
1903 
1904 

1905 
1906 
1907 
1908 
1909 
I9IO 
I9II 
I912 

I913 
I914 

I915 
I916 
I917 
I918 
1919 
1920 


Total  Exports 


$444,177,586 
522,479,922 
586,283,040 
513,442,711 
540,384,671 
602,475,220 
694,865,766 
710,439,441 
835,638,658 
902,377,346 
750,542,257 
823,839,402 
740,513,609 
742,189,755 
879,524,830 
716,183,211 

695,954,507 

742,401,37:, 

857,828,684 

884,480,810 

1,030,278,148 

847,665,194 

892,140,572 

807,538,165 

882,606,938 

1,050,993,556 

1,231,482,330 

1,227,023,302 

1,394,483,082 

1,487,755,557 
1,381,719,407 
1,420,141,679 
1,460,868,185 
1,518,561,666 
1,743,864,500 
1,880,851,078 
1,860,773,346 
1,663,011,104 
1,744,984,720 
2,049,320,199 
2,204,322,409 
2,465,884,149 
2,364,579,148 
2,768,589,340 
4,333,482,885 
6,290,048,394 

5,917,714,371 
7,262,282,686 
8,111,039,733 


Imports 


$626,595,077 
642,136,210 
567,406,342 
533,005,436 
460,741,190 
451,323,136 
437,051,532 

445,777,775 
667,954,746 
642,664,628 
724,639,574 
723,180,914 
667,697,693 
577,527,329 
635,436,13^ 
692,319,768 
723,957,114 
745,131,652 
789,310,409 
844,916,196 
827,402,462 
866,400,922 
654,994,622 
731,969,965 

779,724,674 

764,730,412 

616,049,654 

697,148,489 

849,941,184 

822,673,016 

903,320,948 

1,025,719,257 

991,090,978 

1,117,513,071 

1,226,562,446 

1,434,421,425 

1,194,341,192 

1,311,920,224 

1,557,849,988 

1,527,226,105 

1,653,264,934 

1,813,008,234 

1,893,925,657 
1,674,169,740 
2,197,883,510 
2,659,355,185 

2,945,655,403 
3,595,720,018 
5,238,621,668 


Excess  of  Ex- 
ports over 
Imports 


^18,876,698 


79,643,481 
151,152,084 
257,814,234 
264,661,666 
167,683,912 
259,712,718 

25,902,683 
100,658,488 

72,815,916 
164,662,426 
244,088,694 

23,863,443 


68,518,275 

39,564,614 

202,875,686 


237,145,950 
75,568,200 
102,882,264 
286,263,144 
615,432,676 
529,874,813 
544,541,898 
665,082,541 
478,398,413 
394,422,442 
469,777,267 
401,048,595 
517,302,054 
446,429,653 
666,431,554 
351,090,880 
187,164,732 
522,094,094 
551,057,475 
652,875,915 
470,653,491 
1,094,419,600 

2,135,599,375 
3,630,693,209 
2,974,055,928 
4,136,502,618 
2,872,418,065 


§  -^II] 


Basis  of  Trade 


SS' 


The  table  and  the  chart  facing  pages  550  and  551  will  show 
the  conditions  in  the  United  States  for  the  past  few  decades. 
Finally,  the  following  table  will  show  the  proportion  of  United 
States  exports  and  imports  to  and  from  the  various  parts 
of  the  world  exhibiting  the  changes  produced  by  the  Great  War: 

PERCENTAGE  OF  IMPORTS  AND  EXPORTS  FROM 
AND  TO  GRAND  DIVISIONS.i 


Europe : 

Imports.  . 

Exports.  .  . 
North  America 

Imports.  . 

Exports.  . 
South  America: 

Imports.  . 

Exports.  . 
Asia : 

Imports.  . 

E.xports.  . 
Oceania: 

Imports.  . 
'  E.xports.  . 
Africa: 

Imports.  . 

Exports.  . 


Year  ending  June  30 


1894 


45-05 
78.56 

2549 
13.42 

15-29 
3-72 

10.10 
2.34 

3.28 
1-34 

-53 
•55 


1900 


SI. 84 
74.60 

15-30 
13-45 

11.02 
2.79 

16.45 
4.66 

4-07 
3-II 

1.32 
1-39 


1910 


51-76 
65.10 

19.69 
22.09 

12.59 
5-34 

12.45 
3-49 

2.38 
2.92 


I-I3 
1.06 


1914 


47.29 
62.86 


22.57 
22.36 

11.76 
5-27 

15-15 
4.80 

2.22 
3-53 

i.oi 
1. 18 


1917 


22.96 
68.75 

28.80 
18.50 

20.38 
4.12 

23-14 
6.05 

2.46 
1.74 

2.26 


An  excess  of  imports  may  represent  the  incurring  of  HabiH- 
ties  to  other  countries  which  must  be  met  hereafter,  or  it  may, 
on  the  contrary,  represent  a  Hquidation  of  past  or  present  in- 
debtedness by  other  countries.  In  the  same  way  an  excess  of 
exports  may  mean  that  one  country  is  making  others  its  debt- 
ors or,  on  .the  contrary,  it  may  be  a  measure  of  the  amount  of 
tribute  which  that  country  is  paying  to  others  for  past  or  pres- 

'  Report  on  the  Foreign  Commerce  and  Navigation  of  the  U.  S.,  1904, 
Vol.  II,  p.  1030,  continued  in  the  Statistical  Abstract. 


552  International  Trade  [§212 

ent  favors  in  the  shape  of  capital  invested  or  services  rendered. 
In  itself  the  so-called  balance  of  trade  is  irrelevant. 

The  error  consists  in  confounding  a  surplus  of  exports  over 
imports  with  a  surplus  of  production  over  consumption. 
A  nation,  like  an  individual,  ought  indeed  to  produce  more  than 
it  consumes,  in  the  sense  that  the  surplus  product  or  surplus 
energy  can  be  converted  into  durable  capital  and  thus  contin- 
ually augment  the  command  of  man  over  nature.  But  the 
surplus  of  production  over  consumption  is  a  very  different 
thing  from  a  surplus  of  exports  over  imports. 

212.   Rate  of  International  Exchange 

International  like  domestic  transactions  are  settled  in  terms 
of  money:  the  machinery  for  effecting  payments  differ  in 
magnitude,  not  in  principle.  A  merchant  A  in  France,  let  us 
say,  has  imported  coffee  from  M  in  Brazil,  while  B  in  France 
has  exported  the  same  value  of  silks  to  N  in  Brazil.  Instead 
of  A  sending  money  to  M,  and  N  sending  it  back  to  B,  it  is 
far  simpler  for  A  and  B  to  settle  with  each  other  in  Paris,  and 
M  and  N  in  Rio  de  Janeiro.  B  accordingly  writes  an  order, 
known  as  a  bill  of  exchange,  to  N  directing  him  to  pay  M,  or, 
in  technical  language,  B  draws  on  N;  A  buys  this  bill  from  B 
and  remits  (l.  e.  sends)  it  to  M,  who  presents  it  to  N  and  gets 
it  cashed.  Thus  no  money  is  exported  and  only  one  bill  is 
drawn.  Inasmuch  as  it  is  not  always  easy  for  the  M's  and  N's 
to  find  each  other  in  Rio  de  Janeiro,  and  the  A's  and  B's  in 
Paris,  the  business  of  issuing  and  purchasing  such  bills  has 
become  the  function  of  the  banker  and  the  bill  broker.  More- 
over, since  these  bills  can  be  transferred  by  indorsement,  they 
are  available  for  payment  not  only  between  France  and  Brazil, 
but  between  any  other  countries  that  have  dealings  with  either 
one.  This  explains  the  so-called  "  three-cornered "' exchange, 
where  country  A  imports  from  B  and  pays  by  drafts  on  C, 
which  has  imported  from  A.  Finally,  since  it  is  necessary 
to  make  out  only  one  transferable  order,  bills    are   generally 


§212]  Rate  of  Exchange  553 

drawn  on  that  country  which  possesses  the  larger  financial 
centre.  In  fact,  the  great  mass  of  bills,  especially  in  the  case 
of  exchanges  between  less  important  countries,  are  to-day  drawn 
on  London  in  pounds  sterling.  This  is  due  chiefly  to  the  im- 
mense volume  of  British  trade,  to  the  stability  of  the  British 
currency,  and  to  the  fact  that  the  seller  of  a  bill  on  London 
can  almost  invariably  count  upon  finding  a  buyer  on  advanta- 
geous terms. 

Where  the  reciprocal  liabilities  of  two  countries  are  precisely 
equal,  that  is,  where  the  payments  to  be  made  exactly  balance 
each  other,  exchange  is  said  to  be  at  par.  This  means  that  the 
amount  of  bullion  paid  for  a  bill  in  one  country  is  the  exact 
equivalent  of  the  value  of  the  bullion  received  in  the  other  coun- 
try. The  fine  gold  in  a  pound  sterling,  for  instance,  is  equal  to 
the  fine  gold  in  $4.86|;  hence  the  par  of  exchange  between 
England  and  the  United  States  is  $4.86|.  It  is  obvious  that 
deviations  from  the  par  are  due  to  changes  in  the  condition  of 
reciprocal  liabilities,  which,  owing  to  the  continual  oscilla- 
tions of  the  market,  are  never  for  any  length  of  time  precisely 
equal.  On  some  days  or  seasons  there  will  be  a  balance  in 
one  direction  and  the  demand  from  would-be  purchasers  of 
bills  exceeds  the  supply.  At  other  times  the  supply  of  bills 
offered  for  sale  will  exceed  the  demand.  According  to  these 
fluctuations  bills  become  dear  or  cheap,  and  exchange  will 
be  above  or  below  par.  The  meaning  of  the  phrase  "a  rise 
or  fall  in  the  rate  of  exchange"  depends  on  whether,  in  quot- 
ing the  par,  the  base  line  is  the  domestic  or  the  foreign  unit. 
Thus  in  London  the  par  of  exchange  with  some  countries 
is  quoted  in  pence;  with  others  in  the  currency  of  those  coun- 
tries, like  francs  or  marks.  In  the  United  States  the  par  is 
generally  quoted  in  dollars,  so  that  when  exchange  is  said  to 
rise  it  means  that  purchasers  of  bills  must  pay  more  dollars 
because  there  is  a  greater  demand  for  remittances  to  settle 
obligations  abroad.  The  limits  within  which  the  rate  of  ex- 
change can  deviate  in  either  direction  from  par  are  called   the 


554  International  Trade  [§  212 

"gold  points,"  that  is,  the  points  beyond  which  it  becomes  profit- 
able to  export  or  to  import  gold  in  settlement  of  the  balance. 
It  is  only  in  exceptional  instances,  as  in  the  case  of  a  very 
stringent  money  market  when  dealers  are  ready  to  sell  bills  at 
a  sacrifice  or  when  there  is  a  short-lived  difficulty  in  a  gold- 
producing  country  converting  its  bullion  into  coin,  or  in  a 
war  crisis  like  that  of  1914,  that  it  is  possible  for  exchange  to 
fall  below  the  specie  point,  or  to  rise  above  it. 

When  the  exchanges  are  not  calculated  on  a  gold  basis,  the 
deviations  are  such  that  we  cannot  properly  speak  of  a  par  at 
all.  If  a  gold  standard  country  trades  with  a  silver  standard 
country,  the  par  itself  fluctuates  with  the  daily  change  in  the 
gold  price  of  silver.  The  same  is  true  of  a  depreciated  paper 
currency,  where  a  new  limit  to  the  rise  in  the  price  of  bills  is 
fixed  by  the  premium  on  gold. 

In  the  United  States,  foreign  bills  are  known  as  documentary 
and  finance  bills.  Documentary  bills  are  those  drawn  against 
the  export  of  commodities,  payable  at  sight  or  on  the  expira- 
tion of  three,  ten,  thirty,  sixty  or  ninety  days.  They  have 
attached  to  them  as  security  the  bill  of  lading,  insurance  cer- 
tificates, shippers'  invoices,  and  occasionally  other  documents 
like  consular  certificates,  certificates  of  origin  or  government 
inspection  certificates.  Finance  bills  are  those  drawn  by 
American  bankers  on  their  European  correspondents.  They 
are  often  covered  by  collateral  security  in  the  shape  of  stocks 
or  bonds  listed  on  the  New  York  stock  exchange.  The  ordi- 
nary causes  of  an  over-supply  of  "foreign  bills"  are:  (i)  large 
exports  of  cotton,  wheat  and  corn,  especially  from  August  to 
November  of  each  year;  (2)  heavy  purchases  of  American 
securities  by  European  houses;  (3)  high  interest  rates  in  New 
York.  In  the  latter  case  American  bankers  find  it  profitable  to 
issue  sixty  or  ninety  day  bills  on  London  and  "sell  sterling," 
loaning  the  proceeds  on  Wall  Street.  If  the  interest  rate  in 
New  York  is  six  per  cent  and  the  discount  rate  in  London 
three  per  cent,  there  will  be  a  profit  over  and  above  the  com- 


§212]  Rate  of  Exchange  ^^^ 

missions  of  the  drawees  and  the  British  stamp  taxes.  In  order 
to  eliminate  the  risk  of  having  to  pay  a  higher  price  for  the 
sterling  draft  required  when  the  loan  matures,  they  buy  at 
once  a  foreign  exchange  "future"  or  demand  draft  for  future 
delivery.  These  foreign  exchange  futures"  perform  the 
same  function  as  the  wheat  and  cotton  futures  described  in 

§  154- 

Since  the  rate  of  exchange  depends  on  reciprocal  liabilities, 
anything  that  affects  temporary  indebtedness  causes  the  rate  to 
fluctuate.  If  we  were  to  strike  a  balance  sheet  in  the  foreign 
trade  of  any  country,  we  should  have  to  put  on  the  credit  side 
not  only  the  exports  of  commodities,  but  such  items  as  freights, 
commissions,  brokerages,  the  excess  of  insurance  premiums  over 
payments,  loans  from  a  foreign  country,  interest  on  loans  to  a 
foreign  country,  profits  on  capital  invested  abroad,  the  amount 
drawn  on  letters  of  credit  belonging  to  travellers  from  abroad, 
the  sums  brought  in  by  immigrants,  sales  of  securities,  and  the 
gains  made  on  arbitrage  operations.  All  these  items  act  on 
the  rate  of  exchange  precisely  as  do  exports;  that  is,  they  tend 
to  diminish  the  demand  for  bills  or  to  reduce  the  rate  of  exchange, 
and  they  require  additional  imports  to  restore  the  equilibrium. 
So  on  the  debit  side  we  must  put  not  only  the  imports,  but 
the  purchases  of  securities,  the  loans  to  a  foreign  country,  the 
interest  on  loans  from  abroad,  letters  of  credit  issued  to  travellers 
going  abroad  and  the  like.  These  tend  to  increase  the  demand 
for  bills  and  to  raise  the  rate. 

Gold  will  therefore  be  exported  or  imported  only  when  it 
is  necessary  to  restore  the  equation  of  international  indebted- 
ness. This  equation  or  equilibrium,  however,  as  has  just  been 
explained,  is  not  between  exports  and  imports  but  between 
credits  and  liabilities.  The  equilibrium  is  attained  when  the 
credits  balance  the  liabilities,  and  may  be  perfectly  compatible 
with  an  excess  of  either  imports  or  exports.  Unless  there  are 
special  causes  arising  out  of  some  defects  in  the  currency 
system  itself,  as,  for  instance,  during  the  period  of  the    silver 


^^6  International  Trade  [§  213 

agitation  in  the  United  States,  especially  from  1894  to  1896 
gold  will  be  exported  when  the  liabilities  for  a  time  exceed 
the  credits,  but  not  necessarily  when  the  imports  exceed  the 
exports.  The  permanent  international  distribution  of  the- 
precious  metals  is  therefore  dependent  on  the  conditions  of 
international  trade  in  the  broadest  sense.  Thus  we  reach 
from  another  point  of  view  the  conclusion  reached  above 
(chap,  xxviii),  that  no  country  on  a  sound  currency  basis  can 
permanently  have  more  or  less  money  than  it  needs. 

213.  Growth  of  Free  Trade 

By  free  trade  is  mean  nowadays  the  freedom  of  international 
trade  from  interference  by  government  restriction  or  prohibi- 
tion. Originally,  however,  the  demand  for  freedom  of  trade 
applied  as  well  to  internal  commerce.  In  classic  Rome  the 
portoria  comprised  all  classes  of  taxes  on  transportation.  In 
mediaeval  Europe  town  was  shut  off  against  town  and  province 
against  province  by  burdensome  tolls  and  interdictions,  and 
at  every  point  on  the  land  and  water  highways  large  sums 
were  exacted,  just  as  strangers  who  to-day  traverse  the  region 
of  some  mid-African  potentate  are  required  to  pay  exorbitant 
passage  fees.  The  origin  of  interference  with  trade  is  thus 
to  be  sought  in  the  double  reason,  —  the  primeval  assump- 
tion, of  which  there  are  still  so  many  survivals,  that  strangers 
are  synonymous  with  enemies,  and  the  opportunity  of  securing 
a  simple  and  abundant  revenue.  With  the  growing  recognition 
of  the  mutual  advantages  of  an  unimpeded  traffic,  and  with  the 
discovery  of  other  equally  good  sources  of  income,  these  relics 
of  a  more  primitive  economic  life  gradually  disappeared.  In 
the  United  States  the  results  of  the  commercial  jealousy  among 
the  states  that  had  just  won  their  independence  were  so  disas- 
trous that  the  new  constitution  of  1789  made  it  impossible 
for  any  commonwealth  to  interfere  with  interstate  commerce. 
Freedom  of  internal  trade  is  now  assured  in  the  whole  civilized 
world,  subject  only  to  necessary  police  regulations. 


I  §213]  Growth   of  Free  Trade  ^^y 

Even  in  the  sense  of  international  commerce,  however,  free 
trade  signifies  at  present  something  quite  different  from  what 
it  denoted  in  former  centuries.  In  the  middle  ages  the  liberty 
of  exporting  commodities  was  often  restricted  to  especially  se- 
lected individuals  or  companies  or  limited  to  certain  localities, 
as  in  the  case  of  the  Staple  ^  towns  in  England  and  her  conti- 
nental possessions.  The  cry  for  free  trade  which  arose  in 
seventeenth-century  England  involved  the  demand  for  free- 
dom of  export  in  the  sense  of  freedom  from  monopolist  com- 
panies or  favored  towns  (§  50).  It  was  advanced  by  the  very 
individuals  who  were  clamoring  for  protection  through  high 
duties  on  imports.  Free  trade  in  the  modern  sense  of  free 
imports  was  a  later  conception. 

The  mediaeval  impediments  to  international  trade  apart  from 
those  just  mentioned  consisted  of  taxes  and  prohibitions.  In 
the  opening  centuries  of  the  middle  ages  they  were  applied 
primarily  to  exports,  and  even  after  "free  trade"  in  the  earlier 
sense  had  been  attained  the  customs^  duties  of  the  European 
countries  still  consisted  to  a  large  extent  of  taxes  on  exports. 
ilt  was  free  trade  because  the  duties  applied  to  all  individuals 
|alike,  and  because  the  goods  might  be  shipped  anywhere  after 

^  The  word  staple  is  derived  from  the  German  stapebi, '  to  heap  up," 
and  was  applied  to  certain  commodities  which  were  stored  in  large  quan- 
tities in  the  Steel-yard  {i.e.  the  Staple  yard,  "  Stapelhof  ")  which  the 
I  flansa  towns  maintained  in  London.  The  list  of  staple  articles  which 
at  first  comprised  chiefly  wool,  woolfells,  tin,  and  leather,  was  gradually 
increased  until  the  number  of  staple  articles  at  present  is  considerable. 

1^  The  term  "  customs  tariff  "  has  a  bizarre  origin.  The  English 
kings  were  forced  to  rely  for  their  revenue,  apart  from  the  crown  lands, 
to  a  very  large  extent  on  the  export  and  import  duties.  These  became 
(ithe  customary  revenue,  until  finally  Parliament  granted  various  rates 
known  as  the  Great  Customs  and  the  Little  Customs.  The  second  part 
af  the  modern  term  was  formerly  said  to  be  derived  from  the  town  of 
Farifa  on  the  Mediterranean  near  the  Straits  of  Gibraltar,  where  the 
Barbary  pirates  held  the  straits  and  exacted  a  graduated  scale  of  pas- 
sage money  from  all  vessels.  More  recent  etymologists,  however,  now 
ijtrace  it  to  the  Arabic  "  ta'rif,"  or  inventory. 


^^S  International  Trade  [§213 

payment  of  the  tax.  A  pronounced  increase  of  import  duties, 
however,  was  efTected  by  the  rise  of  the  Mercantile  system  in 
the  seventeenth  century.  With  the  awakening  of  the  national 
spirit  and  the  desire  to  foster  domestic  industry,  restrictions 
were  imposed  on  the  importation  of  any  foreign  commodities 
that  might  interfere  with  home  production.  The  system  of 
protection  was  not  new,  but  it  was  now  appUed  on  a  national 
scale.  In  those  countries  which  possessed  colonies,  like  Por- 
tugal, Spain,  the  Low  Countries,  France  and  England,  it  be- 
came known  as  the  Colonial  system,  and  only  later  acquired 
the  name  of  the  Protective  or  Mercantile  system.  It  consisted 
of  several  or  of  all  of  the  following  factors: 

(i)  Bounties  on  the  raising  or  export  of  raw  materials  in 
the  colonies;  (2)  limitation  to  the  mother  countries  of  the 
export  of  certain  enumerated  commodities  from  the  colonies; 
(3)  prohibition  of  colonial  production  of  manufactured  arti- 
cles; (4)  high  protective  or  even  prohibitory  duties  on  im- 
ports of  manufactures  from  abroad;  (5)  restriction  of  the 
carrying  trade  between  the  colonies  and  the  mother  country 
to  vessels  of  the  latter.  In  the  case  of  food  the  policy  of  agri- 
cultural protection  fluctuated  between  bounties  on  exports  and 
high  duties  on  imports. 

It  was  in  England  that  the  system  was  carried  to  an  extreme 
and  it  was  there  that  the  reaction  first  came.  During  the  perioc 
of  the  industrial  revolution,  which,  as  we  know,  began  in  Eng- 
land several  decades  earlier  than  elsewhere,  Great  Britain  pur- 
sued  a  policy  of  the  most  rigorous  industrial  protection.  Noi 
only  were  many  of  the  import  duties  quite  prohibitory,  but  the 
export  of  machinery  or  even  of  the  plans  of  machinery  wai 
absolutely  forbidden.  Compared  with  the  British  tariffs  of  th( 
end  of  the  eighteenth  and  the  beginning  of  the  nineteenth  cen 
tury,  even  the  most  complex  of  modern  tariffs  is  simplicity  itself 
When  Great  Britain  had  finally  attained  a  virtual  monopoly  0 
the  chief  industries  and  had  established  her  supremacy  on  thi 
ocean,  she  naturally  found  it  to  her  interest  to  let  down  the  bars, 


§213]  Growth  of  Free  Trade  559 

Not  fearing  foreign  competition  any  longer  at  home,  her  great 
need  was  to  secure  an  outlet  for  her  surplus  products.  More- 
over, the  transition  from  the  agricultural  economy  to  the  factory 
system  had  converted  her  from  an  exporter  to  an  importer  of 
food.  The  industrial  interests  experienced  no  serious  oppo- 
sition to  the  policy  of  relaxing  the  barrier  of  import  duties  on 
manufactures.  But  when  they  sought  to  secure  cheaper  mate- 
rials and  food  by  abohshing  the  agricultural  duties,  they  met 
with  a  stout  resistance  from  the  landed  interests.  The  victory 
of  the  Anti-Corn-Law-League  in  the  forties  was  the  final  tri- 
umph of  the  industrial  over  the  agricultural  interests.  Free 
trade  was  now  an  accomplished  fact. 

For  a  short  time  the  free  trade  movement  made  some  head- 
way in  other  European  countries,  although  in  several  it  was 
subordinate  to  the  wider  scheme  of  removing  the  remnants  of 
mediceval  shackles  on  internal  trade  and  industry  in  general. 
With  the  revival  of  the  national  sentiment,  however,  first  in 
Germany  and  Italy  and  then  elsewhere,  the  last  quarter  of 
the  nineteenth  century  witnessed  not  only  a  return  to,  but  an 
intensification  of,  protection.  Finally,  as  the  younger  indus- 
trial nations  are  attaining  their  maturity.  Great  Britain  is  com- 
mencing to  lose  her  proud  position  of  complete  industrial 
domination,  and  we  accordingly  find  since  the  beginning  of 
the  twentieth  century  in  the  classic  home  of  free  trade  itself  a 
sharply  defined  movement  for  a  return  to  protection. 

In  the  United  States  the  system  of  protection  on  a  national 
scale  began  with  the  threatened  dangers  to  the  industries  that 
had  been  called  into  existence  by  the  war  of  1812.  From  that 
day  to  this,  the  protective  poUcy  has  been  followed,  interrupted 
only  for  the  few  decades  during  which  the  non-industrial  South 
was  in  the  political  saddle.  With  the  downfall  of  slavery  there 
began  an  era  of  far  more  stringent  protection  which  has  con- 
tinued with  slight  oscillations  to  the  present. 

The  chief  dates  in  the  tariff  history  of  the  United  States  are 
as  follows:    1789,  first  tarff  with  a  few  small  protective  duties, 


560  International  Trade  [§  214 

and  a  general  level  of  five  per  cent  on  the  non-protected  com- 
modities; 1816,  first  general  protective  tariff,  with  rates  of 
thirty  per  cent  and  over  on  certain  textiles;  1824,  moderate 
increases;  1828,  the  "Tariff  of  Abominations,"  with  higher 
rates  and  duties  on  raw  materials;  1833-1841,  the  Com- 
promise Tariff,  with  gradual  reductions;  1842,  slight  changes, 
but  a  comparatively  low  level;  1846,  the  Free  Trade  Tariff, 
with  ad  valorem  revenue  duties;  1857,  ^  still  lower  revenue 
tariff;  1861,  1862  and  1864,  War  Tariffs,  with  incidental  pro- 
tection; 1871,  ten  per  cent  reduction;  1875,  restoration  to 
the  old  level;  1883,  slight  changes;  1890,  McKinley  Tariff, 
higher  rates;  1894,  Wilson  Tariff,  considerable  reductions; 
1897,  Dingley  Tariff,  higher  rates;  1909,  slight  reductions; 
19 13,  now  in  force,  much  lower  rates. 

Free  trade,  therefore,  as  a  world  policy  is  far  from  being 
assured.  In  fact  the  tendency  of  recent  years  is  on  the  whole 
away  from  the  more  liberal  movement.  It  is  accordingly  neces- 
sary to  consider  the  arguments  somewhat  more  closely. 

214.  The  Argument  for  Protection 

The  reasons  that  have  been  usually  advanced  in  favor  of  pro- 
tection may  be  reduced  to  five  heads. 

(i)  The  "balance  of  trade"  argument  claims  that  it  is 
necessary  to  restrict  imports  in  order  to  secure  a  surplus  of 
exports  and  thus  to  increase  the  wealth  of  the  country  by  aug- 
menting the  stock  of  the  precious  metals  brought  in  through 
this  favorable  balance  of  trade.  The  fallacy  of  this  old  Mer- 
cantilist contention  is  obvious,  {a)  In  the  first  place,  exports, 
as  we  have  seen,  must  in  the  long  run  pay  for  imports,  and 
it  is  impossible  to  increase  the  surplus  of  exports  simply  by 
diminishing  imports,  {b)  Secondly,  coin  is  not  imported  when 
exports  exceed  imports,  but  when  credits  exceed  liabilities, 
(c)  Thirdly,  wealth  does  not  consist  of  money,  but  of  money's 
worth,  and  after  a  certain  point  has  been  reached  the  impor- 
tation   of    coin    defeats  its  own  object.     So  defective    indeed 


§214]  Argument  for  Protection  561 

is  this  argument  that  it  is  no  longer  advanced  by  serious 
students. 

(2)  The  "home  market"  argument  played  a  great  role  in 
( the  earlier  political  controversies  of  the  United  States  and  in  a 

slightly  modified  shape  formed  the  basis  of  Carey's  defence  of 
protection.  It  is  founded  on  the  belief  that  protection  is  bene- 
ficial to  agriculture  as  well  as  to  industry,  because  the  resulting 
increase  of  population  and  wealth  will  afford  a  larger  market 
for  the  food  and  raw  material  of  the  immediate  neighborhood. 
Moreover,  the  existence  of  industrial  centres  will  enable  the 
farmers  to  devote  attention  to  the  more  perishable  products  to 
which  transportation  to  a  distance  would  be  injurious  or  fatal, 
and  will  thus  lead  to  more  intensive  and  diversified  farming. 
Finally,  the  development  of  the  home  market,  it  is  said,  will 
obviate  the  costly  expense  of  transportation  to  distant  countries 
and  wUl  thus  increase  the  wealth  of  society  in  general.  This 
argument  has  now  been  weakened,  partly  because  the  revolu- 
tion in  the  methods  of  transportation  has  materially  lessened 
the  importance  of  distance  as  a  factor  in  cost,  partly  because 
the  agricultural  and  mineral  output  of  the  United  States  has  so 
vastly  transcended  the  limits  of  domestic  consumption  that  the 
prosperity  of  large  sections  depends  upon  securing  an  outlet 
for  the  surplus.  It  is  the  foreign  market,  not  the  home  market, 
which  has  for  several  decades  loomed  large  in  the  imagination 
of  the  farmer. 

(3)  More  important  of  recent  years  is  the  "wages"  argu- 
ment. In  the  United  States  this  takes  the  form  of  ascribing 
to  the  protective  system  the  chief  efiicacy  in  maintaining  high 
wages.  It  declares  that  unless  the  tariff  rates  are  elevated 
enough  at  least  to  compensate  for  the  difference  between  the 
domestic  and  the  foreign  standard  of  wages,  the  former  will 
drop  to  the  level  of  the  latter.  To  this  the  free  trader  is  accus- 
tomed to  rejoin  as  follows:  (a)  The  argument  as  advanced  by 
the  manufacturers  is  insincere,  because  they  arc  interested  not 
in  high  wages  but  in  large  profits,     (b)    There  must  be  a  gross 


562  International  Trade  [§  214 

fallacy  in  the  argument,  because  it  assumes  precisely  the  oppo- 
site form  in  countries  where  wages  are  low.  Germany  demands 
protection  against  England  and  Russia  against  Germany,  on 
the  ground  that  their  low-priced  laborers  need  to  be  protected 
against  their  more  skilful  and  higher  class  competitors.  In 
some  countries  protection  is  demanded  because  wages  are  high; 
in  other  countries,  because  wages  are  low.  If  the  Russian 
argument  is  good,  the  American  argument  must  be  bad,  and 
vice  versa. 

From  the  point  of  view^  of  economic  principle  the  following 
considerations  may  be  advanced.  In  the  first  place,  we  must 
not  forget  the  distinction  between  high  wages  and  high  cost. 
Other  things  being  equal,  higher  wages  indeed  connote  higher 
cost;  but,  as  we  learned  above  (§  125),  there  may  be  an  econ- 
omy in  high  wages.  If  high  wages  are  an  evidence  of  high 
productive  efficiency  and  go  hand  in  hand  with  improved 
machinery  or  superior  natural  advantages,  high  wages  may 
mean  low  cost.  It  is  precisely  in  those  occupations  where 
wages  are  highest  in  comparison  with  abroad,  as  in  the  produc- 
tion of  boots,  bicycles,  cottons  and  wheat,  that  America  is  able 
to  export  successfully,  showing  that  in  these  occupations  at 
least  high  wages  are  no  obstacle  to  cheap  production.  While, 
however,  this  consideration  undeniably  impairs  the  general 
argument,  it  does  not  successfully  meet  the  point  that  there  are 
other  industries  which  would  not  be  able  to  withstand  foreign 
competition  at  home  if  the  present  wage  schedule  were  main- 
tained concurrently  with  a  withdrawal  of  protection.  On  the 
other  hand,  this  proves  only  that  these  particular  industries 
would  not  exist;  it  does  not  prove  that  there  would  be  any 
reduction  in  the  rate  of  wages  in  the  other  industries  which 
would  continue  or  which  might  be  newly  started.  Whether 
wages  would  faU  would,  so  far  as  this  point  is  concerned,  de- 
pend upon  the  possibility  of  profitably  employing  in  the  old  ! 
and  permanent  as  well  as  in  the  newly  started  occupations 
the  capital  and  labor  hitherto  utilized  in  the  now  abandoned 


§  214]  Argument  for  Protection  563 

industries.  To  the  extent  that  this  might  not  be  possible  there 
would  indeed  be  a  tendency  for  wages  to  fall,  because  of  the 
diminished  productivity  of  labor.  It  is  clearly  inadmissible, 
however,  to  argue  that  this  must  necessarily  be  the  case. 

This  leads  to  the  consideration  that  the  direct  influence  of 
protection  on  wages  has  been  exaggerated.  The  rate  of  wages 
depends,  as  we  know  (§  174),  upon  the  location  of  the  margin 
of  productivity.  Where  natural  resources  are  abundant,  wages 
will  be  high  with  or  without  protection.  The  difference  be- 
tween American  and  European  wages  was  no  less  striking  before 
the  policy  of  protection  was  inaugurated  in  the  United  States 
than  it  is  at  present.  In  point  of  fact,  protection  was  then 
demanded  on  the  ground  that  American  wages  were  high,  and 
no  one  thought  of  ascribing  the  existing  high  wages  to  a  non- 
existing  protection.  In  the  same  way,  wages  in  England  have 
exceeded  those  in  Germany  alike  during  the  periods  of  pro- 
tection and  free  trade.  Moreover,  a  large  part  of  industry  in 
every  country,  as  the  railways,  the  building  trades  and  the  like, 
is  necessarily  local  and  not  exposed  to  foreign  competition. 
Wages  in  these  occupations  are  hence  not  directly  affected  by 
any  pohcy  of  fordgn  trade.  It  is  only  to  the  extent  that  pro- 
tection has  an  influence  in  relocating  the  margin  of  the  pro- 
ductivity of  labor  in  general  by  affecting  the  accumulation  of 
capital  and  the  efiiciency  of  labor  that  it  can  exert  any  influence 
on  wages.  But  this  can  be  accomplished  only  if  the  protected 
industries  actually  involve  the  most  profitable  utilization  of  labor 
and  capital.  The  wages  argument  in  this  form,  however,  dif- 
fers considerably  from  the  common  and  crude  formulation,  and 
in  reahty  fuses  into  the  arguments  to  be  mentioned  below.  In 
its  crude  form  the  wages  argument  is  not  convincing.  Pro- 
tection explains  the  high  wages  in  America  as  little  as  the  low 
wages  in  Russia.  Low  wages  are  found  under  protection;  high 
wages  under  free  trade. 

(4)  The  "infant  industry"  argument  is  the  one  which  for 
a  long  time  enjoyed  the  principal  reputation,  especially  because 


564  International  Trade  [§  214 

Mill  in  his  general  defence  of  free  trade  made  in  this  case  an 
important  concession.  Although  in  its  theoretic  formulation 
usually  ascribed  to  Friedrich  List,  it  is  found  substantially  in 
Alexander  Hamilton's  celebrated  Report  on  Manufactures 
in  the  last  decade  of  the  eighteenth  century,  and  more  fully  in 
the  work  of  Daniel  Raymond  with  which  List  had  become  ac- 
quainted during  his  sojourn  in  America.  The  theory  asserts  that 
just  as  children  need  the  fostering  care  of  their  parents  during 
the  period  of  infancy,  so  the  feeble  and  newly  started  industries 
need  to  be  carefully  protected  during  their  years  of  weakness. 
It  is  conceded  that  this  involves  an  expense,  but  it  is  claimed 
that  it  must  not  be  considered  an  economic  loss  any  more  than 
the  expense  of  raising  a  family  is  in  the  true  sense  a  loss;  for 
both  will  more  than  pay  for  themselves  when  they  reach  matu- 
rity. In  the  case  of  industries  this  result  will  be  brought  about 
by  the  competition  between  the  domestic  enterprises,  which 
will  ultimately  reduce  the  prices  of  the  commodities  to  a  point 
lower  than  that  of  the  foreign  wares  with  the  cost  of  transpor- 
tation added. 

List  formulated  the  theory  a  little  differently.  According  to 
him  production  involves  not  only  the  turning  out  of  definite 
commodities,  but  the  creation  at  present  of  the  possibility  of 
turning  out  more  commodities  hereafter.  The  real  economic 
function  of  society  is  not  simply  to  produce  goods  but  to 
produce  productive  forces.  Through  protection,  government 
achieves  this  educational  end  and  thus  trains  the  nation  to 
industrial  efficiency.  National  strength  and  power  are  the 
keynote  of  List's  programme,  just  as  national  industrial  inde- 
pendence was  the  objective  of  Hamilton  and  Raymond.  List's 
work.  The  National  System  of  Political  Economy,  bears  the 
motto,  Et  la  patrie  et  riiumanite,  —  "my  country  as  well  as 
the  world."  The  policy  of  government  must  therefore  change 
with  economic  conditions.  In  the  purely  agricultural  stage 
when  a  country,  like  the  United  States  in  the  eighteenth  cen- 
tury, is  not  yet  ripe  for  industrial  advance,  protection  would 


§  214]  Argument  for  Protection  565 

be  folly;  in  the  fully  developed  industrial  stage,  as  in  England 
during  the  nineteenth  century,  protection  would  be  equally 
inane;  but  in  the  transition  stage,  as  in  the  United  States  and 
Germany  at  present,  protection  is  as  necessary  as  it  will  ulti- 
mately be  profitable. 

It  will  be  recognized  that  List's  argument  differs  from  that 
of  Carey  and  the  home  market  theorists  in  two  respects:  it 
does  not  involve  agricultural  protection  and  it  is  confessedly 
temporary  in  character.  With  the  lapse  of  every  decade  and 
the  growth  of  the  infant  industries  into  lusty  manhood  the 
argument  becomes  continually  weaker,  and  protection  becomes 
less  defensible  as  a  permanent  policy.  This  has  led  to  the  final 
and  most  recent  argument. 

(5)  The  "variegated  production"  argument,  as  it  might  be 
called,  accepts  the  one  point  in  the  Hamilton-List  theory, 
but  discards  the  other.  It  emphasizes  the!  idea  of  national 
industrial  independence,  but  maintains  that  the  chief  deside- 
ratum is  a  well-rounded  economic  development,  with  a  due 
consideration  for  all  the  various  national  interests.  In  a 
country  like  Germany,  for  instance,  where  the  foreign  com- 
petition of  virgin  lands  would  mean  the  ruin  of  domestic  agri- 
culture, the  increased  cost  of  food  and  raw  material,  it  is 
claimed,  would  be  a  cheap  price  to  pay  for  the  preservation 
of  a  healthy  and  prosperous  farming  class.  On  the  other  hand, 
a  variegated  industry  is  undoubtedly  a  sign  of  progress,  and  to 
the  extent  that  it  denotes  a  more  efficient  utihzation  of  labor 
and  capital  and  a  help  to  enterprise,  it  will  result  in  higher 
wages  as  well  as  greater  profits,  a  better  standard  of  life  for 
the  workman  and  a  more  prosperous  condition  for  the  manu- 
facturer. Even  if  domestic  prices  are  higher  than  those  of 
foreign  goods,  the  loss  to  the  individuals  as  consumers  is  more 
than  offset  by  the  gain  that  accrues  to  them  as  producers  and 
as  participants  in  the  general  prosperity.  Thus  protection  is 
demanded  as  a  permanent  policy. 


566  International  Trade  [§  215 

215.  The  Argument  for  Free  Trade 

To  these  arguments  the  free  traders  make  rejoinders  in 
detail,  all  of  them  based  on  an  affirmative  position  which,  as 
elaborated  by  Adam  Smith  and  the  Physiocrats,  is  simplicity 
itself.  International  trade  is  like  internal  trade:  the  freer  it 
is,  the  greater  are  the  advantages  to  both  parties.  The  idea 
that  what  one  man  or  one  country  gains  in  trade  the  other 
loses  is  a  fallacy  scarcely  less  baleful  than  the  idea  that  any 
one  can  get  rich  by  impoverishing  his  customers.  For  in  for- 
eign trade  the  other  country  is  not  so  much  a  rival  as  a  cus- 
tomer; if  by  restricting  imports  we  exclude  their  wares,  by 
diminishing  exports  we  necessarily  prevent  them  from  buying 
our  wares.  By  allowing  trade  to  be  absolutely  unfettered,  every 
one  is  able  to  buy  in  the  cheapest  and  to  sell  in  the  dearest 
market,  and  the  gains  of  all  will  be  at  a  maximum.  Every 
nation  will  thus  be  in  a  position  to  develop  its  natural  advan- 
tages to  the  utmost,  and  the  world's  wealth  will  be  enhanced 
because  of  the  distribution  of  productive  energies  in  the  most 
economical  fashion.  Just  as  free  trade  among  the  separate 
commonwealths  of  the  United  States  results  in  the  most  effi- 
cient utilization  of  economic  forces,  so  free  trade  among  the 
nations  of  the  world  will  bring  about  the  greatest  development 
of  wealth.  Anything  that  obstructs  this  free  trade  is  a  step 
backward. 

According  to  this  argument,  protection  is  injurious  in  sev- 
eral ways,  (i)  It  involves  an  unnecessary  tax  on  the  con- 
sumer, because  it  increases  prices  by  the  amount  of  the  tariff. 
Protection  is  thus  a  robbery  of  the  many  for  the  benefit  of  the 
few.  It  is  class  legislation,  and  for  that  reason  alone  repre- 
hensible. (2)  It  means  a  maladjustment  of  economic  forces. 
Like  all  other  government  interference,  it  savors  of  paternalism 
or  socialism.  (3)  Protection  does  not  really  protect,  because 
it  destroys  as  many  industries  as  it  artificially  fosters.  Well- 
nigh  every  commodity  is  a  raw  material  for  some  other  com- 


§  2i6]  Conclusion  567 

modity.  A  high  duly  on  iron  interferes  with  the  iron  industry; 
a  high  duty  on  iron  products  interferes  with  the  machines 
constructed  of  such  products;  a  high  duty  on  machines  in- 
terferes with  industries  that  use  the  machines.  If  protective 
duties  were  abolished,  it  is  indeed  possible  that  some  indus- 
tries would  disappear,  but  it  is  more  than  likely  that  other 
industries,  now  handicapped  by  high  duties  on  the  manufac- 
tures which  constitute  their  raw  material,  would  flourish.  A 
tariff,  therefore,  means  a  dislocation,  rather  than  a  protection, 
of  industry  in  general.  (4)  Protection  involves  political  cor- 
ruption on  a  gigantic  scale.  One  has  but  to  witness  the  scenes 
in  and  about  the  committee  room  when  a  new  tariff  is  being 
framed  in  the  United  States  to  realize  that  there  exists  no 
more  potent  engine  of  political  demoralization.  Section  is 
pitted  against  section,  interest  against  interest,  business  against 
business,  and  the  final  result  is  due  to  log-rolling  and  a  series 
of  "unholy  aUiances."  (5)  Protection  is  responsible  for  the 
persistence  of  national  animosities,  while  retaliatory  tariffs  and 
commercial  wars  are  often  a  prelude  to  the  actual  clash  of 
arms.  Free  trade  means  peace  and  good-will;  protection 
leads  logically  to  international  hatred  and  bloodshed.  The 
one  implies  the  reign  of  humanity  and  brotherhood,  the  other 
of  particularism  and  enmity.  The  one  spells  progress;  the 
other,  retrogression. 

216.    Conclusion 

If  now  we  attempt  impartially  to  weigh  these  contending 
arguments,  several  points  at  once  force  themselves  upon  our 
attention.  In  the  first  place,  some  of  the  positions  occupied 
by  extremists  on  both  sides  are  untenable.  The  protectionists 
err,  as  we  have  seen,  in  emphasizing  the  balance-of-trade  ar- 
gument, the  home-market  argument  or  the  wages  argument, 
at  least  in  its  crude  form.  The  free  traders  err  in  claiming 
that  protection  is  simply  class  legislation  or  sociaUsm,  or  that 
it  is  responsible  for  national  animosity. 


568  International  Trade  [§  216 

(i)  As  to  class  legislation,  protection  is  supported  in  the 
United  States  by  factory  owners,  laborers,  and  farmers  alike. 
Some  sections  and  some  enterprises,  indeed,  may  derive  more 
benefit  than  others,  but  that  is  the  inevitable  result  of  almost 
all  legislation.  That  in  certain  countries  and  in  special  cases 
indefensible  preferences  inimical  to  the  common  welfare  shel- 
ter themselves  under  the  aegis  of  a  protective  tariff  cannot  be 
used  as  an  indictment  of  the  system  in  general.  Everywhere 
we  must  distinguish  between  use  and  abuse.  Where  popular 
government  and  constitutional  safeguards  exist,  legislation  in 
behalf  of  a  particular  class  is  not  likely  permanently  to  endure 
unless  the  community  identifies  the  interests  of  that  class 
with  its  own.  (2)  Again,  to  affirm  that  protection  is  pater- 
nalism or  socialism  is  simply  to  call  names,  and  to  make  the 
unwarranted  assumption  that  the  ideal  of  government  is  laissez 
Jaire.  (3)  Finally,  to  assert  that  protection  is  the  cause  of 
national  animosity  is  clearly  to  put  the  cart  before  the  horse. 

Abandoning  these  far  from  impregnable  positions,  there  still 
remains  an  element  of  weakness  in  the  arguments  of  both  sides. 
Even  the  more  moderate  advocates  of  protection  are  apt  to 
overrate  its  importance.  The  efficacy  of  protection,  even  at 
the  best,  is  not  unlimited.  No  degree  of  protection  can  make 
cotton  growing  permanently  successful  in  Maine,  or  put  the 
silk  industry  on  a  stable  foundation  in  the  desert  of  Arizona  or 
the  lumber  district  of  Michigan.  Protection  must  work  within 
the  limits  of  general  economic  advantages.  Unless  the  artifi- 
cial environment  can  be  created  at  a  comparatively  small  cost, 
it  is  economically  not  worth  creating.  But  what  is  done  at 
even  a  small  cost  artificially  will  often  come  of  itself  after  a 
time  naturally,  and  sooner  or  later  the  permanence  of  the  in- 
dustry must  rest  on  these  natural  foundations.  Just  as  the 
cotton  mills  which  do  an  export  business,  and  are  therefore 
independent  of  protection,  are  now  springing  up  in  the  South, 
so  various  industries  are  gradually  creeping  farther  West  with- 
out any  protection  against  the  long-established  enterprises  in 


§  2i6]  Conclusion  569 

the  East.  Before  the  foundation  of  the  Australian  common- 
wealth New  South  Wales  and  Victoria  pursued  opposite  poli- 
cies in  foreign  trade,  and  yet  their  industrial  development  was 
approximately  the  same.  Even  if  there  had  never  been  any 
protection  in  the  United,  States,  the  time  would  undoubtedly 
have  come  when  the  mere  accumulation  of  wealth  and  the 
growth  of  population  would  have  superinduced  the  develop- 
ment of  industry. 

On  the  other  hand,  the  free  traders  fail  to  make  allowance 
for  an  important  element  in  the  problem.  The  essence  of  free 
trade  is  cosmopolitanism;  the  essence  of  protection  is  nation- 
alism. Free  trade  holds  up  to  our  contemplation  the  ultimate 
economic  ideal,  but  fails  adequately  to  reckon  with  actual 
forces.  The  universal  republic  is  far  in  the  distance,  and  the 
separate  nations  still  have  an  important  function  to  subserve  in 
developing  their  own  individuality  and  thus  contributing  dis- 
tinctive elements  to  the  common  whole.  Legitimate  compe- 
tition presupposes,  as  we  have  seen  (§  63),  a  relative  equality 
of  conditions;  as  long  as  the  growing  nations  of  the  world  are 
in  a  state  of  economic  inequality,  we  must  expect  and  not  en- 
tirely disapprove  the  effort  on  the  part  of  each  to  attain 
equality  by  hastening  its  own  development.  Ultimately,  no 
doubt,  patriotism  will  be  as  much  of  an  evil  as  particularism 
has  now  become;  but  in  the  present  stage  of  human  progress 
patriotism  is  a  virtue.  Free  traders  often  overlook  the  sound 
kernel  in  what  seems  to  be  the  apple  of  discord. 

As  long  as  nations  continue  to  form  the  economic  units  it 
is  not  competent  to  argue  from  internal  free  trade  to  interna- 
tional free  trade.  The  cotton  mills  in  the  South  may  injure 
their  competitors  in  New  England,  but  the  nation  will  look 
on  with  equanimity,  because  it  means  a  surplus  production 
of  wealth  within  the  country.  When,  however,  an  industry 
in  one  country  is  menaced  by  the  competition  of  another,  it 
is  no  solace  to  the  first  that  the  world's  we-alth  is  being  aug- 
mented at  the  cost  of  its  own. 


570  International  Trade  [§  216 

In  the  main,  then,  the  conclusion  would  seem  to  be  that 
under  certain  conditions  a  protective  policy  is  relatively  defen- 
sible. It  may  be  conceded  that  in  countries  the  mass  of  whose 
exports  are  of  an  industrial  character  protection  is  unwise.  It 
may  be  taken  for  granted  that  when  nations  reach  a  state  of 
comparative  economic  equality,  protection  will  be  unnecessary 
and  even  injurious,  because  if  let  alone  each  will  then  develop 
its  own  natural  advantages.  It  cannot  be  gainsaid  that  protec- 
tion sets  loose  the  selfish  passions  of  individuals  and  classes 
and  that  it  is  responsible  for  its  share  of  political  greed  and 
unsavory  legislation.  But  when  the  economic  resources  of  a 
country  are  not  yet  fully  developed,  it  may  none  the  less  Le 
desirable  to  accelerate  the  pace,  in  the  interests  of  its  own 
immediate  national  progress,  with  the  idea  that  the  contributions 
of  fully  mature  and  economically  well-rounded  nations  to  the 
common  wealth  of  the  globe  will  in  the  long  run  exceed  the 
gain  from  an  uneven  and  one-sided  evolution. 

So  far  as  the  United  States  is  concerned  it  is  scarcely  open  to 
question  that  the  system  of  protection  has  somewhat  hastened 
the  industrial  development  of  the  country.  It  has  not  created 
this  development,  which  was  bound  to  come  sooner  or  later, 
and  it  is  responsible  for  many  incidental  evils.  ,  It  has  con- 
tributed to  political  demoralization;  it  has  sheltered  under  its 
wing  incompetent  individuals  who  would  have  been  eliminated 
to  the  common  advantage  by  free  competition;  it  is  maintained 
in  several  industries  where  it  is  no  longer  needed;  and  it  has. 
done  its  share  in  creating  monopoly  conditions  in  other  indus- 
tries. And  yet  it  is  difficult  to  escape  the  conclusion  that  pro- 
tection has  been  on  the  whole  a  wise  policy  for  the  United  States. 
Without  it,  it  would  probably  have  taken  us  somewhat  longer 
to  come  to  our  own;  without  it  the  immense  amounts  of  capital 
invested  by  foreigners  in  starting  industries  on  this  side  of  the 
tariff  wall  would  have  been  employed  at  home,  to  that  extent 
retarding  the  diversification  of  American  industry  and  the  in- 
fluences that  contribute  to  the  increased  efficiency  of  labor; 


§  2i6]  .  Conclusion  571 

without  it  the  United  States  would  not  have  entered  so  soon 
on  its  role  as  a  world  power;  without  it,  in  short,  the  whole 
tempo  of  economic  progress  would  have  been  slower.  To  those 
who  deplore  the  feverish  haste  of  modern  life,  this  will  serve 
as  an  additional  objection  to  protection.  To  those,  however, 
who  desire  to  face  industrial  facts  as  they  exist,  and  who  realize 
that  in  the  intense  national  rivalry  of  to-day,  to  stand  still  is 
to  retrograde,  the  efforts  of  the  statesmen  who  have  guided  the 
policy  of  the  United  States  almost  from  the  beginning  will  not 
seem  to  be  such  a  tissue  of  errors  or  such  a  chain  of  mistaken 
aspirations  as  they  are  sometimes  represented.  As  the  United 
States  becomes  more  and  more  of  an  industrial  nation,  seeking 
an  outlet  for  its  manufactures,  it  is  indeed  probable  that  the 
tariff  will  be  gradually  lowered,  with  advantage  to  all;  but  he 
would  be  a  hasty  prophet  who  would  predict  any  sudden  or 
material  change  for  a  considerable  time  to  come. 


CHAPTER  XXXIII 
TRANSPORTATION 

217.   References 

A.  T.  Hadley,  Railroad  Transportation  (1885);  B.  H.  Meyer,  Raikcay 
Legislation  in  the  United  Stales  (1903);  H.  R.  Meyer,  Government  Regu- 
lation of  Railway  Rates  (1905);  E.  R.  Johnson,  American  Railway  Trans- 
portation (1910);  E.  R.  Johnson  and  G.  S.  Huebner,  Railroad  Traffic  and 
Rates  (2  vols.,  191 1);  C.  S.  Raper,  Railway  Transportation  (191 2);  W. 
M.  Acworth,  The  Elements  of  Railway  Economics  (1905);  D.  Knoop, 
Outlines  of  Railway  Economics  (1914);  W.  Z.  Ripley,  Railroads,  (2  vols., 
1912-15)  and  (ed.)  Railway  Problems  (n.d.  1913);  F.  N.  Judson,  The  Law 
of  Interstate  Commerce  and  its  Federal  Regulation  (new  ed.,  1912);  L.  J. 
McPherson,  The  Working  of  the  Railroads  (1907)  and  Railroad  Freight 
Rates  (1909);  Cleveland  and  Powell,  Railroad  Promotion  and  Capitali- 
zation (1909);  J.  M.  Clark,  Standards  of  Reasonableness  in  Local  Freight 
Discriminations  (1909);  M.  B.  Hammond,  Railway  Rate  Theories  of 
the  Interstate  Commerce  Commission  (191 1);  Report  of  the  Railroad  Securi- 
ties Cojnmission  (191 2);  S.  O.  Dunn,  The  American  Transportation  Ques- 
tion (191 2)  and  Government  Ownership  of  Raihvays  (1913) ;  A.  M.  Sakolski, 
American  Railroad  Economics  (1913);  M.  Wymond,  Railroad  Valuation 
and  Rates  (1916);  H.  G.  Brown,  Transportation  Rates  a>ui  their  Regula- 
tion (19 1 6). 

218.   Transmission  of  Intelligence  —  The  Post-Office 

Transportation  as  an  economic  factor  includes  the  transmis- 
sion of  intelligence  as  well  as  the  transportation  of  persons  and 
commodities.  The  deeper  influence  of  the  modern  media  of 
transportation  in  overcoming  the  element  of  distance  has  been 
adverted  to  above  (§  19).  The  purpose  of  this  chapter  is  to 
discuss  some  of  the  specific  problems  connected  with  actual 
charges. 

The  chief  media  of  the  geographical  transmission  of  intelli- 
gence are  the  post-oflice,  the  telegraph  and  the  telephone. 
Postal  service  in  classic  antiquity  was  almost  exclusively  for 

572 


§  2i8]       Transmission  of  Intelligence  573 

governmental  purposes.  In  the  middle  ages  it  was  largely  a 
private  enterprise  carried  on  to  serve  the  interests  of  the  mer- 
chants, as  in  the  Hanseatic  towns,  or  in  the  case  of  the  students 
living  far  from  home  at  the  Universities.  It  was  not  until  the 
seventeenth  century  that  a  regular  postal  service  was  inaugu- 
rated in  Europe.  Mail  coaches  were  first  used  by  Pitt  in  1784, 
and  the  modern  postal  system  was  introduced  by  Rowland 
Hill's  reform  in  1840.  The  four  points  of  the  reform  were 
uniformity  of  rate,  penny  postage,  prepayment  and  the  use  of 
stamps.  Up  to  that  time  adhesive  stamps  were  virtually  un- 
known, prepayment  of  postage  was  deemed  a  discourtesy,  and 
rates  were  graduated  according  to  distance  in  conformity  with 
the  so-called  zone  system.  In  England  the  charge  for  a  single 
thin  sheet  varied  from  ^d.  for  15  miles  to  i2d.  for  300  miles. 
A  letter  weighing  two  ounces  from  London  to  Cork  cost  gs. 
lid.  —  about  eighty  times  the  present  rate.  In  America  up 
to  1845  the  rates  were  analogous  —  6  cents  to  25  cents  per 
single  sheet  for  distances  from  30  to  400  miles.  Hill  concluded 
that  the  chief  cost  was  ascribable  to  the  handling  of  the  mails 
at  both  ends,  and  the  suggestion  of  uniformity  carried  the  other 
schemes  of  improvement  with  it.  By  1857  the  reform  was  ac- 
complished in  the  United  States,  and  in  1874  the  international 
post  was  inaugurated.  The  use  of  universal  postage  stamps 
has,  however,  not  yet  been  found  practicable,  owing  to  the 
diversity  in  the  currency  systems. 

The  post-office  business  is  not  confined  to  (i)  the  trans- 
portation of  letters.  In  most  countries  it  includes:  (2)  the 
parcels  post,  (3)  the  passenger  post,  (4)  postal  money  orders, 
(5)  postal  collection  of  bills,  (6)  postal  savings  banks,  (7)  pos- 
tal telegraph  and  (8)  postal  telephone.  In  the  United  States 
all  these  additional  functions,  except  the  fourth,  the  sixth 
and  in  part  the  second,  are  in  private  hands.  But  notwith- 
standing the  restricted  scope  of  the  American  post,  the  factors 
of  national  wealth,  popular  intelligence  and  immense  distances 
have  combined  to  make  the  postal  transactions  of  the  United 


574  Transportation  [§  218 

States  by  far  the  most  important,  not  only  absolutely,  but  rela- 
tively to  population.  The  revenues  for  19 13  were  over 
$266,cx)o,ooo,  wiping  out  the  old  and  considerable  deficit  due 
partly  to  the  growing  demands  for  rural  free  delivery,  and 
partly  to  the  misuse  by  book  publishers  of  the  low  rates  on 
periodicals. 

Postal  charges  are  sometimes  based  upon  the  principle  of 
joint  cost  (§  107).  In  reality,  however,  the  controlling  principle, 
as  we  shall  see  in  the  analogous  case  of  railway  charges  (§  221), 
may  better  be  described  as  the  principle  of  value  of  service. 
Letters  pay  more  than  merchandise,  merchandise  more  than 
books,  books  more  than  newspapers.  Were  the  rates  primarily 
based  on  cost,  they  would  be  inverted,  for  it  obviously  costs 
more  to  transport  a  newspaper  than  a  light  letter.  The  higher 
letter  rate  is  imposed  on  the  principle  that  the  letters  can 
better  afford  to  make  a  substantial  contribution  to  this  end 
than  the  newspapers.  The  receipt  of  the  letter  is  worth 
more  to  the  average  correspondent  than  the  receipt  of  the 
newspaper  to  the  average  subscriber.  It  is  the  value,  not 
the  cost,  of  the  service,  which  is  the  controlling  factor.  Cost  of 
service  enters  only  as  a  minor  ingredient,  for  letter  rates  in- 
crease with  weight,  speed  and  risk,  as  well  as  in  the  case  of 
excess  postage,  special  delivery  and  registered  maUs. 

The  same  holds  good  in  a  modified  way  of  telegraph  and 
telephone  charges.  Newspaper  telegraph  rates  are  lower  than 
ordinary  rates;  business  telephone  rates  higher  than  residential 
rates.  In  only  one  important  respect  is  there  a  difference. 
The  telegraph,  telephone,  and  parcels  post  charges  in  America 
are  still  calculated  according  to  the  zone  system,  long  since 
abandoned  in  the  letter  post.  This  is  due  chiefly  to  the  fact 
that  the  distance  element  in  cost  is  greater  in  the  former  than 
in  the  latter,  but  in  part  also  to  the  fact  that  the  former  are  still 
conducted  on  the  principle  of  ma.ximum  profits  rather  than  of 
the  greatest  social  utility.  The  question  of  government  owner- 
ship will  be  discussed  later  (§  233). 


§  219]  Railway  Development  ^y^ 

219.   Rail-way  Development 

Of  the  modern  media  of  transportation  the  railway  is  the 
one  that  presents  the  most  difficulties.  Canals,  which  devel- 
oped in  England  and  America  at  the  end  of  the  eighteenth  and 
the  beginning  of  the  nineteenth  century,  have  lost  their  origi- 
nal function  as  the  chief  artificial  medium  of  transportation, 
and  are  now  of  importance  only  in  exceptional  cases  like  the 
Erie  and  the  Panama  canals;  or  where,  as  in  some  of  the 
European  countries,  they  are  links  between  rivers  or  between 
the  rivers  and  the  sea. 

When  Solomon  de  Cause  first  advanced  the  idea  of  employ- 
ing steam  as  a  propelling  power  in  1615,  he  was  shut  up  in  the 
mad-house  as  a  hopeless  maniac.  Two  centuries  later,  in 
181 2,  when  Colonel  Stevens  of  Hoboken  proposed  to  build  a 
steam  railway  at  far  less  cost  than  the  projected  Erie  Canal, 
he  was  regarded  as  absurdly  visionary  and  somewhat  demented. 
And  yet  to-day,  almost  within  the  short  space  of  a  human  life, 
we  have  a  vast  network  of  over  half  a  million  miles  of  iron 
roads  encircling  the  civilized  world,  considerably  over  one- 
third  of  which  are  found  in  the  United  States.  The  table  on 
page  576  shows  the  railroad  mUeage  of  the  world  by  countries 
on  Jan.  i,  1913. 

In  the  United  States  the  railway  mileage  was  23  in  1830; 
2,818  in  1840;  g,02i  in  1850;  30,626  in  i860,  and  52,922  in 
1870.  By  1916  the  mileage  was  almost  270,000,  and  the  capital 
invested  about  twenty-one  billions. 

In  Europe  the  railways  were  built  to  accommodate  exist- 
ing traffic;  in  America  they  were  constructed,  for  the  most 
part,  to  create  new  traffic.  In  Europe  the  railway  was  the 
result  of  civilization,  in  America  an  outpost  or  harbinger  of 
civilization,  —  a  difference  which  has  led  to  three  important 
results: 

(i)  The  cost  of  railways  in  America  is  far  lower  than  in 
Europe.    In  a  new  country  the  right  of  way  is  inexpensive,  the 


576 


Transportation 


[§  219 


terminals  acquire  value  largely  as  a  result  of  the  railway  itself. 
Moreover  the  exigencies  of  business  do  not  necessitate  the 
solidity  of  construction  that  is  required  in  older  communities. 


RAILWAY  MILEAGE  IN   EVEN  THOUSANDS  IN   1915 


Europe. 

Germany      .... 
Russia  (in  Europe). 

France  

Austria-Hungary    . 
Great  Britain  and 
Ireland     .... 

Italy 

Spain 

Asia. 
Russia  (in  Asia) 

India 

Japan    

China 


41 

000 

37 

000 

32 

000 

30 

000 

24 

000 

II 

000 

10,000 

II 

000 

35 

000 

8 

000 

7 

000 

North  America. 
United  States  . 
Canada  .  .  . 
Mexico  .... 

South  America. 
Argentina  .  . 
Brazil     .... 

Summary. 
North  America 
Europe  .... 

Asia 

South  America. 

Australasia    .    . 

Africa    .... 

Total    .    .    . 


267,000 
32,000 
16,000 


21,000 
16,000 


324,000 
218,000 
72,000 
49,000 
23,000 
27,000 
713,000 


These  conditions  are  reflected  in  the  following  table  of  average 
cost  of  railways  per  mile,  as  of  191 1: 


England  .  . 
France  .  .  . 
Belgium  .  . 
Germany  .  . 
United  States 


$265,000 

137,000 

177,000 

109,000 

60,000 


(2)  The  desire  of  the  new  communities  to  secure  additional 
facilities  led  to  the  adoption  in  the  United  States  of  the  com- 
petitive method  in  building  railways,  whereas  in  Europe  it  was 
recognized  from  the  outset,  or  soon  realized,  that  one  railway 
between  two  points  could  in  many  cases  perform  as  efficient 
service  as  two  or  three.  What  occurred  at  an  early  date  in 
Europe  is  in  process  of  accomplishment  in  the  United  States. 


§  22o]  Nature  of  Railway  Business         577 

The  American  railways  are  being  rapidly  consolidated  into 
large  groups,  each  of  them  serving  a  particular  section.  In 
the  table  facing  page  578  will  be  found  the  details  of  this 
process  as  it  had  developed  in  191 2,  with  the  existence  of  six 
groups  of  over  15,000  miles  in  length,  and  of  four  groups  of 
20,000  to  30,000  miles. 

(3)  In  the  United  States  the  existence  of  keen  competition, 
of  rapid  improvements  in  facilities,  and  above  all  of  the  growth 
of  the  long-distance  traffic  conspired  to  bring  about  a  re- 
markable progressive  reduction  in  freight  rates  during  the  last 
three  decades  of  the  nineteenth  century.  The  facts  are  rep- 
resented on  the  chart  following  page  580.  But  it  must  be  re- 
membered that  the  earnings  have  nevertheless  increased  faster 
than  the  mileage.  By  1900,  however,  this  reduction  reached  its 
limit,  and  since  that  time  there  has  been  a  slight  advance. 

220.   Nature  of  Railway  Business 

The  railway  business  possesses  three  distinctive  character- 
istics: it  is  more  than  a  mere  private  undertaking;  it  tends  in- 
evitably to  become  a  monopoly;  and,  as  in  all  large  enterprises 
where  the  proportion  of  fixed  capital  is  relatively  great,  there  is 
a  somewhat  peculiar  relation  of  constant  to  variable  expenses. 

(i)  When  investors  put  their  money  into  a  railway,  they 
are  in  a  sense  its  owners.  But  a  railway  is  not  like  a  shoe 
factory.  The  state  grants  to  a  railway  corporation  some  of  its 
own  sovereign  powers,  as  the  right  of  expropriation  of  private 
property;  it  regards  the  railway  as  its  agent,  and  in  return 
insists  upon  a  large  measure  of  responsibility  to  the  public. 
Even  the  private  railway,  therefore,  is  a  quasi-public  institution. 

Railway  rates  and  fares  may  hence  be  regarded  from  two 
different  standpoints.  In  so  far  as  a  railway  is  a  business  cor- 
poration, it  is  a  private  matter:  it  may  construct  its  tariff  in 
accordance  with  general  business  principles;  it  will  endeavor 
to  subserve  primarily  the  interests  of  its  owners.  It  will  strive 
for  the  greatest  possible  profits;  and  this  course  is  legitimate 
37 


^yS  Transportation  [§  220 

and  praiseworthy.  But  in  so  far  as  the  railway  forms  the 
public  highway,  it  is  a  public  matter:  the  objective  point  now 
is  the  general  welfare;  it  aims  not  at  the  greatest  possible 
profits,  but  at  the  greatest  possible  benefits;  it  looks  not  at 
the  interests  of  its  owners,  but  at  the  interests  of  the  public. 
The  one  point  of  view  is  individual,  the  other  is  social.  The 
modern  railway  corporation  shares  both  these  characteristics: 
its  nature  is  hybrid.  To  subordinate  the  public  to  the  private 
element  is  plainly  inadmissible.  Entirely  to  engulf  the  private 
in  the  public  element  is  equally  unfair,  so  long  as  the  railway 
is  not  owned  by  the  state.  In  the  United  States  two  princi- 
ples, at  all  events,  have  been  firmly  established  during  the  last 
generation.  The  one  is  that  the  railway  is  more  than  a  mere 
private  business;  the  other  is  that  the  capital  invested  by 
private  individuals  in  railway  enterprises  does  not  lose  its 
claim  to  a  just  remuneration  or  to  equal  protection  before 
the  law  because  of  the  fact  that  the  railway  is  a  quasi-public 
institution.^ 

(2)  The  railway  tends  sooner  or  later  to  become  a  mo- 
nopoly. So  far  as  the  local  trafiic  is  concerned,  this  is  true 
from  the  outset.  The  chief  consideration  here  is  the  possibihty 
of  increasing  production  without  proportionate  increase  of  plant 
or  capital.  The  trafiic  on  a  railroad  may  be  doubled  without 
the  necessity  of  duplicating  roadbed,  track,  terminals  and 
general  expenses.  Several  lines  paralleling  each  other  at  every 
point  would  not  benefit  the  public  and  would  certainly  ruin 
each  other.  But  even  in  long-distance  traffic  much  the  same 
is  true.  The  theory  of  the  beneficence  of  competition  depends 
on  the  postulate  of  the  transferabiUty  of  capital.  In  case  of 
failure  the  unsuccessful  competitor  deserts  the  enterprise,  but 
the  railway,  once  started,  has  come  to  stay;  it  may  change 
hands,  but  it  will  not,  and  in  many  states  it  cannot,  be  aban- 

1  These  leading  cases  were  the  Granger  Cases  (Munn  v.  Illinois), 
94  U.  S.  113  (1876),  and  the  Nebraska  Rate  Cases  (Smith  v.  Ames), 
169  U.  S.  466  (1898). 


RAILWAY   CONSOLIDATION,  1916 


Vanderbilt  Group:  ' 

New  York  Central  Lines     . 
Chicago  and  Northwestern 


Miles 


i2,8is 
8,107 


Miles 

Northern  Pacific 7,104 

Chicago,  Burlington  and  Quincy      9,366 
Colorado  and  Southern  ....       1,871 


Union  Pacific  Grout: 

Illinois  Central 4,709 

Union  Pacific  System      ....  7,826 

Georgia  Central 1,924 

San  Pedro,  Los  Angeles  and  Salt 

Lake 1,010 

Chicago  and  Alton 1,025 

Morgan  Group: 

Southern  Railway 7.ii7 

Southern    Railway    { 3  of    615 

miles) 307 

Chic,  Indianapolis  and  Louis- 
ville      621 

Mobile  and  Ohio      1,122 

Queen  and  Crescent 926 

Reading  Company    (incl.    New 

Jersey  Central,  633)  -      .    .    .  2,218 

Erie 2,443 

Chicago  Great  Western  .    .    .    .  2,115 

Small  Southern  "Lines      ....  i  ,000 


Pennsylvania  Group: 

Pennsylvania  System 12,102 

Norfolk  and  Western 2,043 

Western  N.Y.  and  Pennsylvania  668 

Long  Island 399 


Canadian  Pacific: 

Parts  of  Main  Line  in  the  U.S. 

about 1,500 

Minneapolis,  St.  Paul  and  Sault 
Ste.  Marie  (Soo  Line)     ...      3,021 

Wisconsin  Central 1,059 

Duluth,   South   Shore   and   At- 
lantic               627 


Gould  Group: 

Texas  and  Pacific 1,994 

St.  Louis  Southwestern  .         •    .       i,754 
Denver  and   Rio   Grande,  incl. 
Rio     Grande     Western     and 
Western  Pacific 3,564 


Hill  Group: 
Great  Northern 8,122 


Walters  Group: 

Louisville  and  Nashivlle  .    .    .    .      5,3o6 

Nashville,  Chattanooga  and  St. 

Louis      1,230 

Atlantic  Coast  Line,  incl.  Plant 

System 5,039 

Georgia    Railroad    (A.  C.  L.  & 

L.  N.  N.,  lessees) 346 

Chicago,  Indianapolis  and  Louis- 
ville (J  of  615)    307 


Independent  Systems: 

Chesapeake  and  Ohio 

Delaware  and  Hudson     .... 

Chicago,  Milwaukee  and  St. 
Paul' 

Atchison,  Topeka  and  Santa  Fe 

Seaboard  Air  Line 

Frisco  System 

Missouri,  Kansas  and  Te.\as  .    . 

Southern  Pacific  System  ■•  .    .    . 

Rock  Island 

Missouri  Pacific 

Wabash      .•    ■    • 

Minneapolis  and  St.  Louis   .    . 

Baltimore  and  Ohio  System,  incl. 
Cincinnati,  Hamilton  and 
Dayton 

Lehigh  Valley  s 

N.  Y.,  New  Haven  and  Hart- 
ford      

Boston  and  Maine 


2,371 
909 

10,075 
11,136 
3,123 
5,253 
3,165 
10,587 
8,330 
7,293 
2,516 
1,550 


5,474 
1,442 


2,065 
2,302 


Summary: 

Vanderbilt  Group 
Union  Pacific  Group 
Morgan  Group .  .  . 
Pennsylvania  Group 
Canadian  Pacific  .  . 
Gould  Group  .  .  • 
Hill  Group  .... 
Walters  Group  .  . 
Independent  Systems 


about 


Total  .  .  . 
Small  Roads  .  . 
Aggregate  mileage 


267,000 


1  A  small  interest  in  the  Vanderbilt  Group  is  owned  by  the  Union  Pacific. 

2  Some  of  the  stock  of  the  Reading  is  owned  by  the  Lake  Shore  and  Michigan. 
'  A  small  interest  in  the  St.  Paul  is  owned  by  the  Union  Pacific. 

<  Pennsylvania  Railroad  has  a  considerable  interest  in  the  Southern  1  acihc. 
*  Friendly  to  Morgan  Group. 


§  22o]         Nature  of  Railway  Business  579 

doned.  A  bankrupt  individual  may  be  disregarded  as  a  com- 
petitor; a  bankrupt  railway  is  a  more  dangerous  competitor 
than  before,  because  the  receiver  need  not  earn  anything  to 
pay  interest  or  dividends.  There  is  hence  every  inducement 
for  the  railways  to  prevent  competition;  and  the  attempts  will 
vary  from  more  or  less  loose  agreements  to  complete  consoli- 
dation. As  Gladstone  said  at  the  time  of  the  EngUsh  discus- 
sion in  1844:  competition  between  railways  is  like  a  lovers' 
quarrel:  breves  inimicitiae,  amicitiae  sempiternae.  Moreover, 
this  tendency  cannot  be  permanently  arrested  by  legislation. 
We  may  prohibit  railway  combinations,  but  we  cannot  prevent 
them.  If  we  make  them  illegal,  we  simply  make  them  secret, 
or  cause  them  to  change  their  form. 

The  public  again  proiits  in  some  respects  no  less  than  the 
railways.  The  curse  of  free  building  of  American  railways  has 
been  the  system  of  parallel  and  often  needless  Hnes.  An  addi- 
tional road  between  two  terminal  points  frequently  represents 
so  much  wasted  capital,  and  the  necessity  of  earning  profits  on 
this  swollen  capital  aggravates  the  burden  on  the  public. 
Competition  between  railways  is  supposed  to  be  responsible 
for  the  facilities  and  low  charges  of  American  railways:  in 
point  of  fact  its  influence  has  been  much  exaggerated.  The 
competition,  while  it  lasts,  is  of  a  desperate  character,  and  each 
line  strains  itself  to  the  utmost  to  secure  the  business  that  is 
often  sufficient  only  for  one.  Charges  may  indeed  be  lowered 
temporarily,  but  the  strenuous  efTort  to  secure  traffic  gave  birth 
to  the  very  worst  abuses  of  railway  management,  —  secret  per- 
sonal discriminations  and  immoderate  local  discriminations. 
The  changes  were  violent,  the  conditions  unstable.  Reduction 
of  rates  was  sometimes  carried  to  such  a  point  that  not  even 
operating  expenses  were  met.  The  railway  wars,  which  were 
the  logical  and  extreme  manifestation  of  railway  competition, 
exhausted  the  companies  and  afforded  but  a  dubious  relief  to 
the  public.  Lowness  of  charge  was  outweighed  by  instability  of 
charge.     The  reduction  itself  was,  moreover,  of  an  ephemeral 


580  Transportation  [§  220 

character.  Continuance  of  low  rates  meant  universal  railway 
bankruptcy;  escape  from  ruin  was  possible  only  through  com- 
bination. If  competition  was  beneficial  to  the  public,  it  was  a 
temporary  benefit;  if  railway  wars,  on  the  other  hand,  threw 
trade  into  confusion  and  engendered  the  most  aggravated 
abuses,  the  cessation  of  competition  was  a  boon  to  the  public. 
As  was  pointed  out  in  §  63,  competition  in  ordinary  business 
is  the  "life  of  trade,"  but  competition  in  railways  might  be 
called  the  death  of  trade,  or  at  all  events  the  death  of  honest 
and  impartial  treatment  of  traders. 

(3)  Railway  outlays  are  divided  into  fixed  charges  or  inter- 
est, and  operating  expenses.  While  the  proportion  which  fixed 
charges  bear  to  total  expenses  varies  with  each  line,  it  may  be 
said  roughly  that  it  is  usually  from  forty  to  fifty  per  cent.  In 
other  words,  well-nigh  half  the  expenses  are  constant  or  inva- 
riable. They  do  not  change  with  the  amount  of  business 
transacted. 

The  operating  expenses  are  divided  into  (o)  maintenance 
of  way  and  stations,  (5)  maintenance  of  equipment,  (c)  con- 
ducting of  transportation  and  (d)  general  expenses,  such  as 
office,  law  and  insurance  expenses.  Of  these  (c)  and,  to  a 
smaller  extent,  (b)  fluctuate  almost  in  proportion  to  business 
transacted;  but  (a)  and  still  more  (d)  will  change  only  very 
slightly  with  the  traffic.  The  proportion  of  each  of  these  four 
classes  to  the  whole  will  vary  with  the  widely  different  charac- 
teristics of  each  line;  but  it  may  be  safely  affirmed  that  in 
general  about  one-half  of  the  operating  expenses  are  constant 
or  invariable. 

The  total  constant  expenditures  of  a  railway  are  thus  the 
fixed  charges  plus  one-half  the  operating  expenses.  In  other 
words,  a  large  majority  of  railway  expenses  are  irrespective  of 
the  amount  of  business.  They  remain  the  same,  notwithstand- 
ing the  increase  or  decrease  of  the  traffic.  The  effect  of  this 
state  of  things  on  the  determination  of  actual  rates  will  be  seen 
in  §  222. 


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§  22i]       Principle  of  Railway  Charges        581 

221.   Principle  of  Railway  Charges 

Whether  the  railway  be  owned  by  the  state  or  by  a  private 
corporation,  there  must,  up  to  a  certain  point  at  least,  be  a 
similarity  in  the  principle  of  charge.  For  the  interests  involved 
are  so  enormous,  and  the  particular  benefits  to  the  patrons  so 
separable,  that  no  country  has  yet  proposed  to  run  its  railways 
free  or  below  cost.  Some  states  like  Prussia  make  large  profits 
out  of  their  government  railways;  others  as  in  Australia  en- 
deavor just  to  cover  the  cost;  but  none  has  attempted  to  make 
up  a  railway  deficit  by  taxation. 

The  principle  sometimes  advanced  as  an  ideal  is  that  of  cost 
of  service.  A  fair  criterion  in  ordinary  commodities  is  cost  of 
production;  why,  it  is  asked,  should  it  not  be  appHed  to  rail- 
way transportation? 

(i)  Obviously,  however,  this  cannot  mean  the  cost  of  the 
particular  service.  In  the  first  place,  such  cost  is  impossible  of 
ascertainment.  There  is  a  wide  disparity  in  the  cost  of  car- 
riage on  the  same  line  according  to  the  changing  conditions 
under  which  the  service  is  performed.  At  one  time  the  greater 
portion  of  the  freight  may  be  carried  over  the  whole  line;  at 
another  the  local  business  may  outweigh  the  through  traffic,  so 
that  the  capacity  of  the  rolling  stock  is  not  fully  utilized.  At 
one  time  the  traflic  -may  move  in  great  part  in  one  direction 
and  the  number  of  "empties"  returned  may  be  abnormally 
large;  at  another  time  there  may  be  far  more  back-loading 
and  a  more  even  distribution  of  traflic.  At  one  time  the  trains 
may  be  started  with  full  loads;  at  another,  they  may  be.  half 
filled.  The  proportion  of  paying  freight  to  dead  weight,  or 
the  amount  of  the  fare,  is  of  considerable  importance.  So  that, 
even  if  it  were  feasible  to  construct  a  tariff  based  on  the  cost 
of  service  of  each  particular  transaction,  it  would  be  of  no  avail 
unless  the  amount  of  freight  remained  an  unalterable  quantity. 

(2)  Secondly,  if  rates  were  based  on  cost  of  service,  most 
of  the  work  performed  by  the  railways  would  come  to  a  stand- 


582  Transportation  [§221 

still.  It  costs  immensely  more  to  transport  a  given  value  of 
heavy  goods  like  coal  than  an  equal  value  of  silk.  If  rates 
were  fixed  according  to  cost  of  carriage,  the  expense  of  con- 
veyance would  so  vastly  exceed  the  prime  cost  of  the  coal  as 
effectually  to  bar  its  use  except  in  the  immediate  neighborhood 
of  the  mines.  In  the  same  way  it  costs  so  much  more  to  bring 
wheat  from  North  Dakota  to  New  York  than  from  Troy  to  New 
York,  that  unless  a  lower  ton-mile  rate  was  granted  on  the  North 
Dakota  business,  there  would  be  no  market  for  it  at  all  in  New 
York.  Individual  cost  of  service  can  hence  not  possibly  be  a 
criterion  of  railway  charges. 

(3)  If  therefore  anything  is  meant  by  cost,  it  must  be  joint 
cost.  As  we  have  seen,  however,  in  our  general  discussion  of 
value,  joint  cost  refers  only  to  the  cost  of  all  the  services  in  the 
aggregate,  and  affords  no  criterion  as  to  the  principle  govern- 
ing the  separate  services.  To  ascertain  this  we  must  revert  to 
an  anterior  law  of  value,  namely,  the  law  of  marginal  utility. 
In  other  words,  the  principle  of  charges  is  not  the  cost  of  the 
individual  service,  but  the  value  of  the  individual  service. 

The  object  of  a  railway  is  to  increase  its  traffic  and  to  de- 
crease its  expenses.  This  it  finds  can  be  best  attained  by  lower- 
ing the  charges  on  certain  classes  of  goods,  or  on  the  same 
classes  to  different  localities.  But  this  is  equivalent  to  saying 
that  what  influences  the  manager  is  not  the  cost,  but  the  value, 
of  the  service.  This  practice  in  railway  parlance  is  called 
"charging  what  the  traffic  will  bear,"  —  an  unfortunate  ex- 
pression, and  liable  to  much  misconception.  If  we  mean  by 
the  principle  "charging  what  the  traffic  is  able  to  bear,"  it  is 
correct;  but  if  we  mean  "charging  what  the  traffic  can  be 
made  to  bear,"  it  is  incorrect.  Charging  what  the  traffic  wiU 
bear,  rightly  understood,  simply  serves  as  an  excuse  for  re- 
ducing rates  on  low-class  traffic  because  it  cannot  bear  higher 
rates.  The  phrase  is  a  bad  one,  because  it  may  be  twisted 
into  meaning  that  the  greatest  possible  charges  on  high-class 
goods   are   also   legitimate.     Correctly   interpreted,    it   justifies 


§  22i]        Principle  of  Railway  Charges        583 

lower  charges  on  certain  kinds  of  business;  incorrectly  inter- 
preted, it  seems  to  justify  extortionate  charges  on  other  kinds 
of  business. 

The  attempt  to  make  the  theory  of  joint  cost  the  funda- 
mental explanation  of  railway  rates,  is,  moreover,  erroneous  for 
another  reason.  Prices  are  fixed  at  the  point  of  cost  of  pro- 
duction or  joint  cost,  as  we  know,  only  when  the  products  are 
competitive  products.  There  is  always  a  marginal  producer 
who  sells  at  cost  price  without  any  profit.  But  in  monopolies 
there  is  no  marginal  producer,  and,  as  we  have  seen  (§  no), 
the  relation  of  price  to  cost  is  far  more  indirect.  Price  may 
be  continually  above  cost,  the  difference  being  the  monopoly 
profits.  Price  in  such  cases  is  fixed  according  to  the  principle 
of  monopoly  ma.ximum  returns,  which  is  nothing  but  charging 
what  the  consumer  can  afford  to  pay.  The  charges  on  each 
monopoly  by-product  will  be  put  at  the  highest  price  consist- 
ent with  greatest  sales  or  profits,  and  not  necessarily  propor- 
tionate to  cost  of  production.  As  we  have  learned  in  the  last 
paragraph,  however,  a  railroad  is  in  the  long  run  a  monopoly. 
Railway  charges,  therefore,  are  fixed  not  by  any  principle  of 
cost,  but  by  the  principle  of  monopoly  profits,  that  is,  char- 
ging what  the  traffic  wUl  bear. 

This  also  explains  the  analogy  that  is  frequently  drawn  be- 
tween railway  charges  and  taxation,  with  the  idea  of  ability  or 
capacity  to  pay.  Taxation  is  compulsory,  but  payment  for  a 
monopoly  of  a  necessity  of  life  (like  railroad  charges  in  the 
present  stage  of  business  activity)  is  in  one  sense  equally  com- 
pulsory. The  principle  of  charging  what  the  trafiic  will  bear, 
in  any  monopoly,  has  reference  to  the  ability  of  the  patron  to 
pay.  The  monopolist  is  indeed  not  moved  by  ethical  consid- 
erations, but  the  price  that  he  charges  depends  upon  what  the 
purchaser  can  afiford  to  pay.  Justice  in  taxation  requires  that 
a  man  shall  pay  in  some  proportion  to  what  he  can  afford ;  the 
fixing  of  monopoly  price  depends  on  what  he  thinks  he  can 
afford:   at  bottom,  there  is  a  real  analogy  between  the  cases. 


584  Transportation  [§222 

Some  object  to  the  value  of  service  principle  as  the  ex- 
planation of  railway  rates,  because  they  hold  that  value  means 
intrinsic  utility  and  grain  and  coal  would  then  be  charged 
more  than  silks  and  spices.  This  is  to  revert  to  the  old  fallacy 
that  value  and  utility  are  identical.  The  slightest  acquaintance 
with  the  modern  theory  of  value  suffices  to  dispel  this  objec- 
tion. When  we  say  that  railway  rates  are  fi.xed  by  value  of 
service,  we  mean  that  the  marginal  utility  of  the  service  is 
definitely  estimated  by  the  shipper;  that  if  the  rate  exceeds 
this  estimate,  the  commodity  will  not  be  sent;  and  that  a 
different  estimate  may  be  put  on  each  shipment  or  commodity. 
The  marginal  utility  of  the  service  fixes  the  prices  of  all  com- 
modities; but  it  is  only  in  the  case  of  competitive  production 
that  this  is  equivalent  to  joint  cost.  Thus  the  theory  of  joint 
cost,  in  so  far  as  it  is  true  at  all,  is  a  subordinate  part  of  a 
more  general  rule;  and  to  the  extent  that  the  railroad  is  a  monop- 
oly, the  theory  becomes  less  and  less  true.  The  dispute  will 
easily  be  avoided  as  soon  as  it  is  recognized  that  cost  of  service 
or  joint  cost  is  simply  a  variation  of  value  of  service,  and  that 
the  theory  of  marginal  utility  (which  is  nothing  but  value  of 
service)  is  the  fundamental  explanation  not  only  of  railroad 
charges  but  of  all  prices. 

222.   Classification 

Charging  according  to  what  the  service  is  worth  results  in 
the  two  fundamental  principles  of  classification  and  discrimi- 
nation. Classification  is  due  to  the  fact  that  the  same  service 
has  a  varying  value  when  rendered  to  different  commodities. 
Discrimination  {i.  e.  local  discrimination)  is  due  to  the  fact 
that  the  same  service  has  a  varying  value  when  rendered  to 
different  places.  Whether  the  same  service  has  a  varjdng 
value  for  the  freight  of  different  persons,  and  may -thus  give 
rise  to  personal  discrimination,  is  a  question  to  be  treated  by 
itself. 

Value  of  service  influences  classification  in  a  double  way,  — ■ 


§222]  Classification  585 

it  puts  the  same  articles  into  different  classes,  it  puts  different 
articles  into  different  classes.  The  first  method  is  illustrated 
by  the  distinction  between  freight  and  express  traffic.  In  the 
United  States  the  general  classification  applies  only  to  freight 
traffic.  In  the  rest  of  the  world,  where  separate  express  com- 
panies are  unknown,  the  rates  are  classified  according  to  this 
distinction,  as  in  England,  where  they  are  known  as  goods  and 
parcels  rates.  In  the  same  way  passenger  fares  on  express 
trains  are  often  higher  than  on  ordinary  trains. 

Far  more  important,  however,  is  the  classification  of  different 
articles  into  different  categories.  Cost  of  service  indeed  in- 
fluences classification  to  a  minor  extent  in  so  far  as  the  articles 
differ  in  bulk,  shape,  risk,  direction,  or  regularity  of  shipment, 
or  as  passengers  use  a  Pullman  or  a  plain  coach.  Actual  rates, 
however,  are  mainly  influenced  not  by  cost  of  service,  but  by 
what  the  service  is  worth.  The  main  point  is  the  development 
of  the  traffic.  We  must  keep  in  mind  the  distinction  drawn  in 
§220  between  the  constant  and  the  variable  expenses.  If  the 
freight  or  the  cheap  passenger  business,  like  immigrant  traffic, 
can  be  secured  at  rates  which  will  more  than  cover  the  variable 
expenses,  —  the  actual  hauling  and  a  proportionate  part  of  the 
station  expenses,  —  it  will  pay  the  road  to  take  this  business, 
because  a  contribution,  however  small,  is  thereby  made  to  fixed 
expenses.  These  would  have  to  be  met  at  all  events.  A  small 
contribution  to  constant  expenses  is  better  than  none  at  all. 
Yet  to  apply  this  low  rate  to  all  business  would  ruin  the 
company. 

Classification  again  benefits  the  public.  The  meagre  surplus 
over  hauling  expenses  on  the  cheap  goods  contributes,  if  ever 
so  little,  to  the  fixed  expenses,  and  diminishes  to  this  extent 
the  amount  which  it  is  necessary  to  raise  from  the  remaining 
traffic.  If  we  had  no  classification,  not  only  would  we  not 
have  cheap  meat  and  cheap  wheat,  but  the  charges  on  the  dear 
goods  would  be  higher.  It  reduces  the  rates  on  the  cheap 
goods  immensely  and  the  rates  on  the  dear  goods  moderately. 


586  Transportation  [§222 

The  principle  of  classification  is  the  first  corollary  from  the 
distinction  between  constant  and  variable  expenditures. 

To  uphold  the  legitimacy  and  necessity  of  classification  is, 
however,  quite  another  thing  from  attempting  to  palliate  unde- 
niable abuses.  Classification  plays  only  a  very  sHght  role  in 
passenger  traffic  because,  especially  in  democratic  countries, 
one  man  is  considered  as  good  as  another;  but  the  freight 
classifications,  most  of  which  have  grown  up  in  a  hap-hazard 
way,  are  full  of  inconsistencies.  There  are  two  problems  in 
freight  classification,  —  to  secure  uniformity  between  different 
railways  and  to  secure  uniformity  between  shippers. 

(i)  At  the  outset  every  road  had  its  own  classification. 
With  the  growth  of  consolidation  and  agreements  classifica- 
tions apphcable  to  connecting  and  competing  roads  were 
elaborated.  In  a  small  country  like  Italy  it  has  been  found 
possible  to  construct  a  uniform  tariff  for  the  entire  country. 
In  the  United  States  the  difficulties  arising  from  the  conflicting 
interests  of  different  sections  have  been  found  insuperable. 
The  South  demands  a  specially  low  rate  on  cotton,  the  West 
on  wheat,  the  Pacific  slope  on  fruit,  and  so  on.  There  are 
now  four  chief  classifications,  —  the  official  (in  the  North  and 
East),  the  Southern,  the  Western,  and  the  Transcontinental 
classifications.  Cotton  piece  goods,  for  instance,  are  in  class 
one  in  the  Western,  in  class  three  in  the  official,  and  in  class 
five  in  the  Southern  classifications.  What  the  railroads,  how- 
ever, are  not  able  to  accomplish  by  mutual  agreement  will 
probably  be  effected  in  no  distant  future  by  legislation.^  If 
this  is  done,  however,  the  greatest  care  will  have  to  be  taken, 
when  prescribing  a  national  classification,  to  provide  for  an 
adequate  number  of  special  or  commodity  rates  outside  of  the 
regular  classes. 

(2)     The  American  classifications,   although  far  superior  to 

1  A  histoiy  of  the  attempts  to  secure  a  national  classification  will 
be  found  ia  Interstate  Commerce  Commission  Reports,  second,  fourth, 
and  eleventh  and  thirty-second  reports. 


§  223]  Discrimination  587 

those  of  a  few  decades  ago,  are  still  often  lacking  in  uniformity, 
in  stability  and  in  justice.  If  the  railway  is  a  quasi-public  in- 
stitution, these  wide  powers  of  fixing  the  classes  cannot  be  put 
in  the  hands  of  private  individuals  or  corporations  as  sole  arbi- 
ters. To  imply  with  many  of  our  eloquent  railway  officials  that 
there  is  an  identity  of  interests  between  the  railway  and  the 
shippers  is  unfortunately  not  borne  out  by  experience.  To 
demand,  on  the  other  hand,  a  rigid  law  prescribing  all  details 
would  impute  to  our  legislators  a  knowledge  which  they  cannot 
possess.  To  cure  the  abuses  of  classification  by  Congress 
designating  administrative  agents  who,  under  the  spoils  system, 
shall  fix  the  classification,  would  be  a  jump  from  the  frying  pan 
into  the  fire.  An  escape  from  the  dilemma  seems  to  be  outlined 
in  the  principle  of  advisory  boards  or  consultative  councils, 
which  have  been  established  in  Germany,  Italy  and  Japan. 
These  councils  represent  the  commercial  interests,  and  the 
classification  finally  adopted  is  the  result  of  a  conference,  and 
often  a  compromise,  between  the  shippers  and  the  railways. 

223.   Discriniiuatiou 

As  opposed  to  classification  a  discrimination  may  be  defined 
as  an  inequaUty  in  the  charge  for  hauling  a  like  quantity  of 
similar  articles  or  individuals  for  an  equal  distance  in  the  same 
manner.     All  discrimination  is  either  personal  or  local. 

While  differences  in  rates  based  on  classification  are  in  a 
sense  legitimate,  it  is  impossible  to  find  any  principle  on  which 
to  base  personal  discriminations.  Personal  discriminations  in 
passenger  fares  take  the  form  of  free  passes;  personal  discrim- 
inations in  freight  rates  occur  in  a  multiplicity  of  ways.  They 
are  beyond  doubt  the  most  flagitious  abuses  of  arbitrary  railway 
management. 

Allowance  for  quantity  or  making  a  lower  charge  for  larger 
shipments  is  indeed,  within  certain  limits,  defensible.  It  is  then, 
however,  really  a  matter  of  classification,  and  may  be  upheld  in 
the  same  way  as  the  distinction  between  slow  freight  and  ex- 


588  Transportation  [§223 

press  business.  The  difficulty,  however,  is  to  select  the  unit 
above  which  the  rates  shall  be  the  same  to  all.  Shall  it  be  the 
pound,  hundredweight,  ton,  car  load,  cargo  lot,  or  train  load? 
Usually  the  car  load  is  taken  as  the  dividing  line,  and  as  such 
does  not  excite  much  dissatisfaction,  although  even  this  may 
sometimes  work  injustice  to  the  small  shipper  and  cause  inde- 
fensible preferences. 

But  if  this  comparatively  unimportant  difference  be  only 
partially  justifiable,  the  vastly  greater  discriminations  which 
cannot  even  claim  cost  of  service  as  an  ostensible  reason  are 
indefensible  on  any  theory  whatever.  To  build  up  one  man's 
business  at  the  expense  of  another's  can  never  be  acknowledged 
a  legitimate  function  of  common  carriers.  The  railroad  ad- 
vocates at  one  time  asserted  that  a  business  firm  makes  wholesale 
rates  less  than  retail  rates  and  gives  special  figures  to  different 
customers.  Why  is  not  the  same  principle  applicable,  they 
asked,  to  the  railroad  business?  They  utterly  failed  to  perceive 
that  the  railroad  is  not  simply  a  private  business,  but  a  public 
trust;  that  a  merchant  is  not  bound  to  treat  his  customers 
equally,  but  that  a  railroad  exercises  public  functions,  is  invested 
with  pubhc  rights  and  therefore  has  public  duties.  The  whole- 
sale principle  or  allowance  for  quantity,  when  carried  to  this 
extreme,  becomes  utterly  untenable. 

Personal  discriminations,  then,  cannot  be  upheld  on  any 
theory.  To  attempt  to  abolish  them  by  relying  on  free  compe- 
tition as  a  remedy  is  absurd.  Cut  rates  and  rebates  were  never 
so  common  as  during  railway  wars.  The  great  mass  of  personal 
discriminations  were  due  not  to  the  volition  of  the  railway 
managers,  but  to  the  stress  of  competition  and  the  desire  to 
attract  business.  The  Interstate  Commerce  Law,  which  in  one 
section  attempts  to  maintain  competition  by  prohibiting  rail- 
way pools  and  in  another  section  forbids  personal  discrimina- 
tion, is  endeavoring  to  secure  two  diametrically  opposite  ends. 
If  we  strengthen  competition,  we  inevitably  increase  personal 
discrimination.    It  is  not  so  much  the  Elkins  law  of  1903,  impos- 


§  223]  Discrimination  589 

ing  severe  penalties,  as  the  spread  of  combination  among  the 
railways  which  is  responsible  for  the  recent  gradual  disappear- 
ance of  personal  discrimination. 

Local  discrimination  may  arise  in  two  ways,  (i)  The  road 
may  desire  to  extend  its  traffic  in  commodities  coming  from  a 
distance.  If  they  are  to  be  carried  at  all,  they  must  be  trans- 
ported at  less  than  regular  rates.  Hence  arises  the  necessity 
of  a  distinction  between  local  and  through  traffic.  Goods 
coming  from  a  distance  must  be  treated  in  the  same  manner 
as  cheap  goods.  Local  discrimination  is  like  classification. 
The  distant  freight  is  the  cheap  freight,  the  near  freight  is  the 
dear  freight.  Local  discrimination  of  this  kind  is  in  principle 
legitimate.  The  long-distance  traffic,  by  making  a  contribution 
to  constant  expenses,  reduces  the  local  rate  as  well.  It  is  the 
immense  long-distance  traffic  in  the  United  States  which  has 
enabled  the  American  railways  to  reduce  their  charges,  local 
as  well  as  through,  far  below  the  European  level.  The  abolition 
of  local  discriminations  of  this  kind  would  level  up,  not  level 
down. 

(2)  Local  discriminations  may  arise  from  competition  at 
the  junction  points.  The  competition  may  be  due  to  cheaper 
water  transportation,  to  a  foreign  railway  or  to  a  better  equipped 
or  shorter  domestic  railway.  A  lower  rate  to  the  competitive 
centre  is  the  sole  condition  of  the  retention  of  the  competitive 
traffic. 

It  is  sometimes  stated  that  local  discriminations  are  in  prin- 
ciple reprehensible  because  they  remove  geographical  advan- 
tages; and  it  is  claimed  that  the  true  principle  is  that  of  the 
equal  mileage  rate.  This  argument,  however,  is  not  convincing. 
There  is  no  such  thing  as  an  inviolable  geographical  advantage. 
There  are  no  vested  rights  in  situation.  One  town  may  be 
connected  with  the  coast  only  by  a  turnpike;  another  farther 
distant  may  have  the  good  fortune  to  see  a  railway  built 
through  its  limits.  Has  the  former  any  cause  to  complain 
because  it  is  robbed  of  the  benefits  of  its  hitherto  advantageous 


590  Transportation  [§223 

situation?  The  object  of  all  improved  means  of  communica- 
tion is,  in  fact,  to  annihilate  distance,  to  minimize  differences 
in  situation.  Maintenance  of  original  geographical  advantages 
would  render  impossible  all  but  local  business  in  the  vast  mass 
of  commodities;  it  would  again  turn  our  Western  fields  into 
barren  wastes.  DifTerential  rates  widen  the  field  of  supply; 
they  increase  the  specialization  of  wants  and  create  the  possi- 
bility of  satisfying  these  wants,  so  characteristic  of  modern 
society.  Opposition  to  local  discriminations  arises  from  view- 
ing solely  the  interests  of  the  producer;  rational  economics  leads 
us  to  consider  also  the  consumer.  Opposition  to  differential 
rates  is  based  on  the  supposed  welfare  of  a  particular  class  or 
section  of  producers;  a  wise  national  economy  will  ponder 
over  the  interests  of  the  whole  community,  irrespective  of  sec- 
tional jealousies.  If  local  discriminations  are  so  arranged  that 
distant  producers  are  enabled  to  compete  with  local  producers, 
the  latter  may  indeed  see  their  profits  curtailed,  but  the  former 
will  see  their  profits  increased,  and  the  consuming  public  as  a 
whole  will  evidently  gain. 

This  does  not,  however,  justify  all  differential  rates.  The 
abuses  have  often  been  outrageous,  the  methods  undeserving 
of  palliation.  Local  interests  have  been  disregarded,  and  the 
discriminations  so  conducted  as  to  ruin  whole  businesses  or 
towns  in  order  to  build  up  others.  It  is  not  necessary  to  as- 
cribe illicit  motives  to  the  railway  managers.  They  have  often 
been  forced  into  unjust  discrimination  by  the  stress  of  compe- 
tition and  the  instinct  of  self-preservation.  But  railway  officials 
commit  a  great  mistake  in  calling  all  local  discriminations  just, 
because  they  are  the  effect  of  competition,  precisely  as  the 
demagogues  err  in  opposing  undeniably  valid  discriminations 
and  at  the  same  time  upholding  competition.  Competition  is 
made  to  cover  a  multitude  of  sins.  Railway  profits  and  public 
interests  do  not  always  go  hand  in  hand.  The  possible  diversity 
of  interests  renders  some  form  of  governmental  supervision 
imperative. 


§223]  Discrimination  591 

It  is  indeed  true  that,  in  the  main,  rates  should  increase 
with  distance  or  mileage.  Some  extremists  propose  to  apply 
to  railways  the  postal  principle  of  making  a  uniform  charge 
irrespective  of  distance.  This,  however,  completcdy  overlooks 
the  fact  that  in  the  post  the  chief  item  of  cost  is  the  handling 
at  each  end  and  that  the  expense  of  transportation  itself  is  an 
insignificant  fraction  of  the  whole;  while  in  the  railway,  on 
the  other  hand,  a  far  greater  part  of  the  cost,  especially  in 
longer  distances,  is  the  mere  hauling  expense.  To  disregard 
distance  would  require  such  an  immensely  high  average  rate 
as  to  make  even  wagon  transportation  cheaper  for  short 
stretches.  The  postal  principle  is  utterly  impracticable  as 
well  as  theoretically  erroneous. 

But  while  cost  increases  with  distance,  it  does  not  increase 
proportionately  to  distance,  precisely  because  of  the  relation 
of  constant  to  variable  expenses.  Hence  distance  rates  do 
not  imply,  as  some  demand,  equal  mileage  rates.  Both  the 
cost  and  the  value  of  the  service  increase  less  rapidly  than  the 
distance.  Even  in  the  relatively  simple  passenger  business 
mileage  rates  are  used  only  for  comparatively  short  distances; 
the  fares  to  the  more  distant  competitive  centres  are  almost 
always  less  than  mileage  rates.  As  soon,  however,  as  we  have 
any  derogation  from  the  principle  of  equal  mileage,  we  have  a 
local  discrimination. 

The  simplest  limitation  on  the  practice  of  local  discrimi- 
nations is  the  enactment  of  the  short-haul  principle.  This 
prescribes  that  the  charge  to  any  intermediate  point  shall  not 
exceed  the  aggregate  charge  to  the  final  point.  Although 
there  is  no  vested  interest  in  geographical  situation,  it  be- 
comes an  anomaly  to  charge  to  a  way  station  the  rate  to  a 
competing  point  further  on,  plus  the  additional  rate  from 
the  competing  point  back  to  the  way  station.  This  is  an 
inversion  of  the  principle  of  distance.  The  attempt,  however, 
to  enforce  such  a  hard  and  fast  rule  is  perilous.  As  long  as 
the  law  cannot  be  applied  to  waterways  and  to  foreign  com- 


592  Transportation  f§  223 

peting  railways  as  well,  the  anomalies  cannot  be  entirely  re- 
moved. Unless  the  railways  from  the  East  to  San  Francisco 
met  the  all-sea  rates,  or  the  Canadian  rates  to  the  coast,  they 
would  lose  their  through  transcontinental  traffic,  and  would 
have  to  raise  their  intermediate  rates  as  well.  While  therefore 
the  Interstate  Commerce  Law  accepts  the  short-haul  principle, 
it  permits  the  commission  to  make  exceptions;  and  among 
the  nicest  duties  imposed  on  the  commission  is  that  of  deter- 
mining when  an  exception  is  legitimate. 

But  if  even  this  comparatively  simple  matter  requires  such 
delicate  handling,  what  shall  be  said  of  the  great  mass  of  other 
discriminations,  where  the  charge  to  an  intermediate  station  is 
relatively,  without  being  absolutely,  greater  than  the  charge  to 
a  more  distant  point?  Among  the  perplexing  problems  that 
arise  are  the  following:  Is  it  legitimate  to  make  export  or  im- 
port rates  less  than  domestic  rates,  that  is,  to  charge  less  be- 
tween the  two  points  for  the  same  commodities  when  the  haul 
is  only  a  part  of  the  distance  to  a  foreign  country?  Is  it  rea- 
sonable to  make  group  or  blanket  rates,  that  is,  to  put  aU 
stations  within  a  radius  of  a  few  tens  or  even  hundreds  of  miles 
in  a  group  and  make  the  same  charge  to  all?  Is  it  just  to  make 
allowance  for  "milling  in  transit"  or  "floating  cotton,"  that 
is,  to  allow  grain  to  go  from  the  fields  to  the  mill,  or  cotton 
from  the  plantation  to  the  compresses,  or  logs  from  the  forest 
to  the  saw-mill,  and  then  to  proceed  to  the  point  of  destina- 
tion on  its  proportion  of  a  through  rate  rather  than  the  local 
rate?  Is  it  defensible  to  follow  the  "basing  point"  system, 
whereby  local  rates  are  based  according  to  the  relative  dis- 
tance of  the  local  points  from  the  competitive  points,  the  rate 
being  ascertained  in  each  case  by  adding  to  the  through  rate 
to  the  basing  point  the  local  rate  from  that  point  back  to  the 
local  point?  Is  it  permissible  to  make  differentials  between 
cities  —  as,  for  instance,  on  grain,  flour,  and  provisions,  where 
the  domestic  rates  from  the  West  to  New  York  are  two  cents  a 
hundredweight  higher  than  to  Philadelphia,  three  cents  higher 


§  224]  Railway  Regulation  593 

than  to  Baltimore  and  two  cents  lower  than  to  Boston,  with 
different  figures  for  ex-lake  grain  (grain  from  the  West  which 
leaves  Bufi"alo  after  storage,  on  a  new  and  independent  rate) 
and  still  different  figures  for  export  rates? 

These  are  only  'a  few  of  the  embarrassing  questions  which 
call  for  decision.  Three  points  are,  however,  obvious:  (i)  No 
hard  and  fast  rule  can  be  laid  down.  All  the  circumstances 
and  conditions  must  be  taken  into  consideration,  and  these 
may  change  from  day  to  day  or  season  to  season.  (2)  It  is 
not  only  a  question  of  railway  practice,  but  of  business  and 
local  rivalry.  (3)  The  final  decision  of  such  dehcate  and  im- 
portant matters  must  not  be  left  to  the  shippers  or  the  railways, 
but  must  be  intrusted  to  some  higher  authority,  which  should  be 
not  only  expert  in  the  transportation  business,  but  completely 
impartial  as  between  the  railways  and  the  shippers,  on  the  one 
hand,  and  the  rival  sectional  interests  on  the  other. 

224.   Rail\vay  Regulation 

The  preceding  discussion  has  made  it  clear  that  some  form 
of  railway  regulation  is  necessary.  There  are  five  different 
methods  of  dealing  with  railways,  (i)  The  government  may 
own  and  manage  the  railways,  as  in  Prussia,  Italy,  Switzerland 
and  Australasia.  (2)  The  government  may  own  the  railways, 
but  leave  the  operation  in  private  hands,  as  in  some  of  the 
roads  in  North  Carolina  and  all  the  roads  in  some  minor 
European  countries.  (3)  The  railwaj'^s  may  be  owned  by 
private  companies,  but  operated  by  the  government,  as  until 
1905  in  Italy.  (4)  There  may  be  mixed  ownership  and  opera- 
tion, either  with  the  idea  that  the  competition  of  the  state 
railways  will  regulate  the  private  companies,  as  formerly  in 
Belgium,  or  without  any  such  intention,  as  at  present  in  Russia, 
France,  India  and  many  other  countries.  (5)  The  railways 
may  be  left  to  private  ownership  and  management,  as  in  Eng- 
land and  the  United  States. 

The  general  discussion  of  government  ownership  or  manage- 
38 


594  Transportation  [§  224 

ment,  and  the  special  reasons  against  it  in  the  United  States, 
may  be  left  to  a  later  chapter.  Points  one  to  three  may  there- 
fore be  omitted.  On  the  fourth  point  the  experience  of  Belgium 
has  conclusively  proven  that  a  government  railway  is  not  an 
effective  regulator  of  private  companies,  and  that  instead  of 
the  government  railway  drawing  the  private  companies  up  to 
its  level,  the  government  railways,  on  the  contrary,  are  invari- 
ably pulled  down  by  the  stress  of  competition  to  the  level  of 
the  private  companies,  with  personal  discrimination  and  ille- 
gitimate preferences  of  all  kinds.  This  leaves  as  the  practical 
problem  in  Great  Britain  and  the  United  States  point  five, 
or  the  governmental  supervision  of  railways  which  remain  in 
private  hands. 

In  Great  Britain,  where  the  situation  is  much  simpler  be- 
cause of  the  smallness  of  the  country  and  the  extended  sea- 
coast,  competition  was  eliminated  at  an  early  date,  and  personal 
discriminations  have  been  correspondingly  rare.  The  chief 
questions  have  been  those  of  relative  rates  between  localities 
and  maximum  rates  on  different  classes.  After  several  more 
or  less  feeble  attempts  at  regulation  a  railway  commission 
was  instituted  in  1873,  with  judicial  powers.  Their  findings 
as  to  facts  are  final;  as  to  law,  they  are  reviewable  by  a  higher 
court.  In  1888  a  law  was  enacted  giving  the  Board  of  Trade 
power  to  suggest  maximum  rates,  and  during  the  years  1891-94 
Parliament  accepted  the  recommendation  and  enacted  maxi- 
mum rates.  Finally,  in  1894  it  was  provided  that  no  railway 
should  increase  its  existing  rates  within  the  maximum  without 
affirmatively  proving  to  the  satisfaction  of  the  Railway  Com- 
mission that  the  increase  was  justifiable.  It  has  been  claimed 
that  this  provision  has  seriously  interfered  with  the  progressive 
reduction  of  rates  which  would  naturally  come  through  the 
increase  of  business;  for  the  freedom  to  reduce  a  rate,  and  the 
lack  of  freedom  to  restore  it  if  found  to  be  unprofitable,  will 
prevent  even  the  most  venturesome  railway  manager  from 
making  a  hazardous  experiment. 


§  224]  Railway  Regulation  595 

In  the  United  States  the  early  attempts  at  regulation  were 
confined  to  the  separate  states.  It  was  not  until  1887  that 
national  supervision  began  with  the  enactment  of  the  Inter- 
state Commerce  Law.  The  law  was  the  result  of  a  compro- 
mise. It  endeavored  to  maintain  competition,  and  prohibited 
pools,  but  it  did  not  try  to  lay  down  a  rigid  short-haul  rule. 
Not  only  was  pooling  forbidden,  but  under  the  Sherman  Anti- 
Trust  Law  of  iSgo  it  was  subsequently  held  that  even  railway 
traffic  associations  are  illegal.  The  author  of  the  anti-pooling 
clause  —  Senator  Reagan,  of  Texas,  who  later  served  on  the 
railway  commission  of  his  native  state  —  subsequently  con- 
fessed that  his  original  opinion  had  been  erroneous,  and  the 
Supreme  Court  of  the  United  States,  in  declaring  the  illegality 
of  traffic  associations,  conceded  that  they  were  economically 
beneficial. 

The  Act  of  1887  prohibited  unjust  and  unreasonable  charges, 
and  instituted  the  Interstate  Commerce  Commission  to  enforce 
the  law.  Unlike  its  English  predecessor,  the  American  com- 
mission is  not  a  judicial  court,  and  its  decisions  are  not  final 
even  as  to  facts.  In  the  closing  years  of  the  century  the  powers 
of  the  Interstate  Commerce  Commission  were  practically  emas- 
culated by  various  decisions  of  the  Supreme  Court  so  that  little 
of  its  functions  remained  except  the  collection  of  statistics. 
With  the  beginning  of  the  new  century  the  powers  of  the  Com- 
mission were  gradually  restored  and  then  increased  by  legislation. 
After  the  great  agitation  due  to  the  efforts  of  President  Roosevelt, 
the  Hepburn  law  of  1906  was  enacted,  which  gave  the  Com- 
mission definite  powers  to  determine  and  to  prescribe  maximum 
rates.  The  law  was  now  also  extended  to  express  and  sleeping 
car  companies.  Furthermore,  the  commodity  clause  forbade  rail- 
ways from  transporting  any  commodity,  other  than  timber  or 
the  products  thereof,  which  might  be  manufactured,  mined,  or 


596  Transportation  [§  224 

produced  by  it  or  in  the  production  of  which  it  might  have  any 
interest  other  tnan  that  of  common  carrier.  Moreover  a  uniform 
system  of  accounting  (which  went  into  effect  in  1907)  was  pre- 
scribed for  all  common-carriers.  The  Mann-Elkins  Act  of  1910 
extended  the  law  to  telegraph  and  telephone  companies  and  gave 
the  Commission  additional  powers  to  prescribe  classification  and 
to  suspend  changes  in  rates.  In  191 2  the  commission  was 
invested  with  the  duty  of  making  a  valuation  of  all  the  railroad 
property  in  the  country,  and  in  1914,  tne  Supreme  Court  virtually 
held^  that  the  state  railway  commissions  must  give  way  to  the 
national  commission  in  the  control  of  rates.  Within  a  few  years, 
however,  the  rigid  restrictions  of  the  law  so  reduced  railway 
profits  as  to  prevent  further  construction  and  to  limit  facilities. 
As  a  consequence,  after  the  interlude  of  the  war  during  which 
the  railways  were  managed  by  the  government,  the  Esch- 
Cummins  law  of  1920  was  enacted.  On  the  one  hand,  the  law 
conferred  increasing  powers  on  the  Commission  not  only  over 
rates  but  over  traffic,  the  extension  and  construction  of  lines,  tiie 
keeping  of  accounts,  and  the  regulation  of  securities.  But,  on 
the  other  hand,  the  law  directed  the  Commission  to  fix  rates  at 
such  a  point  as  to  yield  a  six  per  cent  return  on  a  valuation  to 
be  ascertained  by  the  Commission.  Furthermore,  it  not  only 
authorized  pooling,  but  directed  the  commission  to  elaborate  a 
plan  for  the  more  comprehensive  consolidation  of  all  railways; 
it  did  away  with  all  state  powers  over  securities;  and  it  created 
a  national  labor  board  to  adjust  differences  between  the  railways 
and  their  employees. 

Thus  the  country  has  started  upon  a  new  era.  The  government 
now  exercises  a  fourfold  control  over  rates,  facilities,  accounts 
and  securities  and  it  provides  a  fourfold  program  of  aims  to  be 
achieved:  (i)  assurance  of  adequate  earnings  in  order  to  induce 
proper  service;  (2)  the  amicable  and  more  or  less  automatic 
adjustment  of  rates  and  labor  disputes;  (3)  regional  operation 

1  In  the  Shreveport  case,  decided  in  May,  1914. 


§  224]      ,  Railway  Regulation  597 

with  definitely  central  control;  (4)  division  of  profits  above  a  fair 
minimum  between  the  railways  and  the  government.  It  is  not 
unreasonable  to  hope  that  such  a  governmental  control  of  private 
monopoly  may  be  made  to  redound  to  the  interests  of  the  entire 
community,  including  the  investors,  the  employees,  the  shippers, 
and  the  ultimate  consumers. 


CHAPTER  XXXIV 
INSURANCE 

225.  Reference 

A.  H.  Willett,  The  Economic  Theory  of  Risk  and  Insurance  (Columbia 
Studies,  XIV,  No.  2,  1901);  S.  S.  Huebner,  Property  Insurance  (1911); 
W.  F.  Gephart,  Principles  of  Insurance  (191 1)  and  Insurance  and  the 
State  (1913);  L.  E.  Zartman,  Yale  Readings  in  Insurance  (2  vols.,  1910); 
C.  Walford,  Insurance  Cyclopedia  (5  vols.,  1871-1880);  and  Insurance 
Guide  and  Handbook  (3d  ed.,  1900);  A.  J.  Wilson,  The  Business  of  In- 
surance (1904);  A.  C.  Campbell,  Insurance  and  Crime  (1902);  Journal 
of  the  Institute  of  Actuaries  (1850-);  Transactions  of  the  Actuarial  Society 
of  America  (1889-). 

Special  Classes  of  Insurance:  F.  Martin,  History  of  Lloyds  (1876); 
M.  M.  Dawson,  The  Business  of  Life  Insurance  (1906);  W.  Gow,  Marine 
Insurance  (1895);  W.  Alexander,  The  Life  Insurance  Company  (1905); 
B.  J.  Hendrick,  The  Story  of  Life  Insurance  (1907);  F.  H.  Kitchen,  Prin- 
ciples and  Practice  of  Fire  Insurance  (1904);  P.  Mayet,  Agricultural  In- 
surance (1893) ;  E.  MacNeill,  A  Study  of  Accidents  and  Accident  Insurance 
(1900);   C.  B.  Elliott,  Fidelity  Insurance  (1907). 

226.  Nature  of  Insurance 

The  economic  life  of  man  is  subject  to  uncertainty.  Even 
the  old  adage  that  there  is  nothing  sure  in  life  save  death  and 
taxes  is  incomplete,  because  even  though  the  uncertainty  does 
not  attach  to  the  fact  itself,  it  does  attach  to  the  time  of  the 
occurrence  or  to  the  magnitude  of  the  phenomenon.  Insurance 
is  a  device  to  remove  the  economic  consequences  of  uncertainty. 

From  one  point  of  view  it  might  be  claimed  that  there  is 
no  such  thing  as  chance.  Everything  that  happens  in  the  uni- 
verse is  obedient  to  law;  that  is,  it  is  the  result  of  a  cause.  If 
we  had  full  knowledge  of  all  causes,  we  could  predict  every 
event  with  accuracy,  and  thus  eliminate  such  a  thing  as  a 
chance  occurrence.  For  if  we  previously  knew  that  it  was  to 
happen  at  that  moment,  it  would  not  be  a  chance.     On  the 

598 


§  226]  Nature  of  Insurance  599 

other  hand,  the  word  chance  may  be  used  in  a  slightly  different 
sense.  If  a  pack  of  cards  has  been  well  shufHed,  it  is  an  even 
chance  that  we  turn  up  at  the  first  deal  a  black  or  a  red  card. 
Chance  here  means  the  degree  of  probability  of  an  occurrence. 
The  more  numerous  the  occurrences,  the  more  regularity  will 
their  be  in  their  happening;  so  that  when  we  have  very  large 
numbers,  there  is  even  such  a  thing  as  a  law  of  chance. 

The  degree  of  uncertainty,  however,  is  not  the  same  thing 
as  the  degree  of  probability.  When  the  probability  is  zero  or 
small,  the  uncertainty  indeed  is  zero  or  small,  and  there  is  no 
chance  or  little  chance.  The  uncertainty,  however,  increases 
only  up  to  a  certain  point.  The  uncertainty  is  greatest  when 
the  chances  are  even,  and  then  diminishes  as  the  chances  in- 
crease, until  the  uncertainty  disappears,  when  the  probabil- 
ity of  occurrence  becomes  infinite.  Certainty  means  either 
no  probability  or  no  improbability;  after  the  point  of  even 
chance  has  been  passed,  probability  increases  as  the  uncer- 
tainty decreases. 

The  term  risk  may  be  applied  to  either  probability  or  un- 
certainty. If  there  is  only  one  chance  in  a  hundred  of  a  man's 
success  in  an  enterprise,  we  say  that  he  is  taking  an  immense 
risk.  In  that  case  the  probability  of  failure  is  immense,  but 
the  uncertainty  very  small.  In  ordinary  economic  life,  how- 
ever, men  will  rarely  enter  upon  any  business  enterprise  unless 
they  think  that  they  have  at  least  an  even  chance  of  success, 
and  usually  not  unless  they  think  that  they  have  more  than 
this  even  chance.  In  other  words,  they  will  not  act  unless 
they  feel  that  although  both  the  probability  of  loss  and  the  un- 
certainty increase  together,  both  may  be  guarded  against. 
Putting  it  in  another  way,  the  risk  with  which  economic 
activity  commonly  concerns  itself  is  the  degree  of  uncertainty 
rather  than  the  degree  of  probability.  The  need  of  protection 
against  risk  grows,  therefore,  with  the  degree  of  uncertainty 
which  in  economic  actions  increases  as  probability  increases. 

Uncertainty  is  clearly  a  disadvantage,  which  every  prudent 


6oo  Insurance  [§  226 

man  desires  as  far  as  possilile  to  eliminate.  This  can  be  ac- 
complished in  three  ways:  by  avoidance,  by  prevention,  or  by 
assumption  of  risk. 

(i)  In  certain  cases  involving  the  investment  of  capital,  he 
can  avoid  the  risk  by  joining  to  the  economic  transaction  in 
question  another  which  counterbalances  it.  This,  as  we  have 
learned  (§  154),  is  one  of  the  functions  of  speculation,  as  in 
the  ordinary  "covering  transactions"  of  the  cotton,  or  wheat, 
or  foreign  exchange  "futures."  The  scope  of  such  speculative 
transactions,  however,  is  comparatively  restricted. 

(2)  He  can  prevent  or  greatly  reduce  the  degree  of  risk. 
If  he  wants  to  be  assured  that  his  house  will  not  burn  down, 
he  may  make  it  absolutely  fire-proof.  That,  however,  involves 
an  immense  expense  which  he  perhaps  cannot  afford.  If  this 
were  the  only  alternative,  he  would  make  the  house  fairly  sub- 
stantial, putting  capital  into  it  up  to  the  point  where  the  ad- 
ditional cost  would  in  his  opinion  outweigh  the  chance  of  loss 
by  fire.  An  ounce  of  prevention  is  worth  a  pound  of  cure; 
but  two  pounds  of  prevention  are  not  worth  a  pound  of  cure. 
In  modern  society  as  a  whole,  far  greater  sums  are  spent  in 
preventing  losses  of  all  kinds  than  formerly;  in  fact,  govern- 
ment expenditures  are  to-day  to  an  overwhelming  extent  of  a 
preventive  rather  than  of  a  remedial  character.  But  that  is 
because  we  realize  that  the  cost  of  a  board  of  health  is  insig- 
nificant when  compared  to  that  of  a  plague,  or  the  cost  of 
education  slight  in  comparison  to  the  economic  and  political 
losses  due  to  popular  ignorance.  Municipal  ordinances  may 
compel  individuals  to  erect  substantial  structures,  but  the 
prevention  of  risk  can  profitably  go  only  to  a  certain  point. 
Moreover,  no  matter  how  elaborate  the  precautions,  there  are 
certain  catastrophes  against  which  no  human  ingenuity  can 
avail.  Earthquake,  lightning,  flood  and  tempest  will  destroy 
property  just  as  accident,  non-employment  or  illness  will  de- 
stroy personal  income.  Something  more  than  prevention  is 
requisite. 


§227]  Growth  of  Insurance  601 

(3)  He  can  face  and  assume  the  risk,  but  reduce  it  by  com- 
bining his  own  risk  with  that  of  others  into  a  group  and  dis- 
tributing the  losses  to  the  group  as  a  whole.  In  this  way  he 
makes  what  was  uncertain  sure.  This  method,  hence,  is  called 
assurance  or,  more  commonly  in  modern  times,  insurance. 

227.   Growth  of  Insurance 

Insurance  is  in  its  important  manifestations  a  modern  phe- 
nomenon, and  a  result  of  industrial  capitalism.  It  is  due  to 
the  fact  not  so  much  that  men  are  now  more  anxious  to  avoid 
risk  than  formerly,  but  that  risks  have  increased  to  a  prodigious 
extent.  It  seems  at  first  blush  absurd  to  say  that  modern  civi- 
lization, which  implies  prudence  and  forethought,  should  at  the 
same  time  mean  increased  risk.  The  contrary  assertion,  how- 
ever, which  assumes  that  economic  progress  implies  the  dimi- 
nution of  risk,  is  clearly  an  error.  Progress  and  increased  risk 
are  not  incompatible.  Uncertainty  is  assuredly  to  be  depre- 
cated; but  if  the  saving  of  cost  due  to  a  new  invention  or  a 
new  economic  process  exceeds  the  risk  of  loss  due  to  the  greater 
uncertainty,  society  is  justified  in  adopting  it.  An  express  train, 
for  instance,  involves  more  risks  than  a  slow  freight,  but  is  none 
the  less  an  indication  of  progress.  It  is  only  when  an  eighteen- 
hour  train  is  put  on  between  New  York  and  Chicago  that  it 
becomes  a  question  whether  the  risk  does  not  outweigh  the 
advantage.  Up  to  that  point,  at  all  events,  it  is  either  directly 
or  indirectly  an  economic  gain.  The  increase  of  risk  in  mod- 
ern times  is  therefore  ascribable  to  the  spirit  of  invention  and 
the  better  utilization  of  the  forces  of  nature.  Risk  and  progress 
increase  together.  The  pace  of  modern  life  is  rapid;  competi- 
tion and  the  factory  system  have  engendered  uncertainties, 
whereas  the  leisurely  mediaeval  methods  of  customary  price  and 
handicraft  industry  meant  a  slow  and  certain  humdrum.  In- 
dustrial capitalism  has  virtually  created  risk  as  well  as  the  way 
of  meeting  risk  through  insurance. 

The  beginnings  of  insurance  are  to  be  sought  in  three  entirely 


6o2  Insurance  [§  227 

distinct  germs:  primitive  mutual  help,  the  classic  bottomry 
loans  and  the  mediaeval  rent  charges. 

(i)  Well-nigh  all  primitive  societies  practise  some  methods 
of  collective  responsibility.  Thus  in  the  earliest  Teutonic 
Frithgilds  we  find  mutual  responsibility  for  loss  by  murder, 
fire,  theft,  or  loss  of  cattle.  Again,  in  the  medieval  guilds 
the  principle  of  joint  guarantee  was  almost  universal.  The 
same  principle  in  one  sense  underlies  the  modern  mutual  in- 
surance company.  But  it  would  be  hazardous  to  attempt  to 
trace  any  direct  connection  between  these  early  groups  and 
the  modern  business  enterprises. 

(2)  The  first^  permanent  and  well-authenticated  form  of 
business  insurance  is  that  of  the  only  kind  of  enterprise  in 
which  capital  was  employed  on  a  large  scale,  namely,  in  over- 
sea trading.  Ancient  and  mediaeval  insurance  started  with 
commercial  capital.  The  marine  insurance  of  the  middle  ages 
was  an  outgrowth  of  the  ancient  system  of  bottomry  loan, 
known  in  classic  Rome  as  foenus  nauticum  or  pecunia  trajec- 
titia.  If  the  owner  of  a  vessel  needed  funds,  he  could  secure 
a  loan  on  condition  that  it  be  repaid  with  interest,  provided 
the  ship  were  not  lost  or  did  not  fall  into  the  hands  of  enemies 
or  pirates.  The  bottomry  contract  was  therefore  in  a  certain 
sense  an  embryonic  insurance,  but  with  the  peculiarities  that  the 
insurance  money  was  paid  in  advance  and  that  it  included  a 
loan  as  well.  In  point  of  fact  the  loan,  rather  than  the  insur- 
ance, was  the  principal  thing.  When  a  new  form  of  contract 
was  devised  in  the  Italian  towns  of  the  thirteenth  and  four- 
teenth centuries,  whereby  the  payment  was  made  after,  and  not 
before,  the  loss  of  the  ship,  the  loan  element  disappeared  and 
the  contract  became  one  of  insurance.     The  person   who  as- 

^  The  only  instance  of  insurance,  pure  and  simple,  in  classic  antiquity 
that  has  come  down  to  us  is  that  mentioned  by  Boeckh,  Public  Economy 
of  Athens,  where  Antigenes  of  Rhodes  undertook  for  a  payment  of  eight 
drachmas  per  slave  to  make  good  his  price,  as  estimated  by  the  owner 
at  the  time  of  his  escape. 


§  227]  Growth  of  Insurance  603 

sumed  the  risk  was  called  the  underwriter  of  the  risk.  In 
England  these  marine  underwriters  or  insurers  met  in  the 
coffee-houses,  one  of  which  at  the  end  of  the  seventeenth  century- 
happened  to  be  owned  by  Edward  Lloyd.  This  gradually  drew 
to  it  more  and  more  of  the  underwriters,  until  by  the  middle  of 
the  next  century  virtually  all  the  marine  insurance  was  done 
at  "Lloyd's." 

(3)  The  final  source  of  modern  insurance  can  be  traced 
more  particularly  in  connection  with  the  growth  of  life  insur- 
ance. It  is  true  that  marine  insurance  itself  after  a  time  de- 
veloped in  part  into  a  kind  of  life  insurance,  for  it  gradually 
became  the  custom  for  the  underwriter  to  insure  not  only  the 
ship  and  its  contents  in  the  shape  of  commodities,  but  also  the 
cattle  and  the  lives  of  the  passengers  themselves.  Far  more 
important,  however,  as  a  source  of  life  insurance  was  the 
mediaeval  system  of  rent  charges.  These  were  utilized  to 
evade  the  rigor  of  the  usury  laws.  Loans  were  made  to  in- 
dividuals on  the  transfer  of  lands  for  a  definite  time,  during 
which  the  lender  enjoyed  the  fruits.  These  fruits  were  in  lieu 
of  the  interest  which  was  prohibited  by  statute.  Gradually, 
however,  instead  of  transferring  the  use  of  the  lands  them- 
selves, there  was  substituted  in  its  stead  the  obligation  to  pay 
a  rent  or  annuity,  called  a  rent  charge,  because  the  annual  pay- 
ment was  charged  on  the  rent  or  produce  of  the  land.  These 
annuities  were  either  for  life  or  for  a  term  of  years.  Life  annui- 
ties were  granted,  after  a  time,  even  by  the  church  through  the 
societas  sacri  officii. 

From  decade  to  decade,  however,  the  speculative  element 
developed.  The  transaction  became  popular.  It  was  techni- 
cally not  a  loan,  but  a  transfer  of  land.  It  yielded  large 
returns,  —  eight  to  twelve  per  cent  on  the  capital  invested. 
More  important  than  all,  it  was  generally  accompanied  by  the 
condition  that  the  principal  should  be  repaid  only  if  the 
annuity-payer  (the  borrower)  should  die  before  the  annuitant, 
in  the  course  of  time  the  payment  of  a  capital  sum  was  dis- 


6o4  Insurance  [§  227 

pcnsed  with,  but  an  annuity  (premium)  was  paid  every  year  and 
the  capital  was  handed  over  only  in  case  of  the  death  of  the 
premium  payer.  Thus  the  sj'stem  became  practically  indis- 
tinguishable from  life  insurance.  Other  mediaeval  methods  akin 
to  modern  insurance  were  the  ransom  and  the  marriage-portion 
annuities.  In  the  first  case  payments  were  made  to  individuals 
to  provide  against  possible  capture  by  brigands.  In  the 
second  case  the  church  took  loans  in  the  shape  of  annuities 
from  individuals  without  paying  interest,  but  with  the  obh- 
gation  to  pay  the  capital  when  the  daughter  married.  In  the 
middle  of  the  seventeenth  century  an  Italian  by  the  name  of 
Tonti  introduced  the  principle  of  survivorship  in  a  group  and 
thus  gave  rise  to  the  modern  Tontine  annuity. 

Out  of  these  small  origins  the  modern  system  of  insurance 
has  developed.  The  most  important  forms  of  modern  insur- 
ance are  marine,  life  and  fire  insurance.  Marine  insurance 
has  not  changed  much  in  character  for  several  centuries.  But 
life  insurance  could  not  develop  on  a  large  scale  until  the  scien- 
tific principles  underlying  it  were  thoroughly  understood. 

In  every  insurance  the  (gross)  premium  payable  by  the 
beneficiary  who  takes  out  the  insurance  is  composed  of  two 
parts,  —  the  so-called  loading  and  the  net  premium,  or  sum 
which  is  mathematically  necessary  for  the  creation  of  a  fund 
sufl&cient  to  enable  the  company  to  pay  the  policy  in  full  when 
it  falls  due.  The  loading  is  the  amount  added  to  the  net 
premium  to  provide  for  expenses  and  for  contingencies,  like 
loss  of  invested  funds  or  failure  to  earn  the  anticipated  inter- 
est. The  important  constituent  naturally  is  the  net  premium. 
In  life  insurance  this  is  the  joint  product  of  the  theory  of 
probabilities,  the  experience  of  vital  statistics  and  a  calcula- 
tion of  interest  rates.  The  so-called  mortality  table  shows 
how  many  in  a  given  large  number  of  persons  will  live  to 
each  age,  and  consequently  how  many  will  die  at  each  age. 
It  is  impossible  to  predict  in  what  year  a  particular  individual 
will  die,  but  it  is  possible  to  state  with  approximate  accuracy 


§  22-j\  Growth  of  Insurance  605 

how  many  out  of  a  given  number  will  die  at  any  specified 
age.  On  the  basis  of  such  a  mortality  table  it  is  a  simple  arith- 
metical computation  to  ascertain  the  premium  necessary  to  be 
charged  at  any  given  age  in  order  to  create  a  fund  which  will 
accumulate  to  a  fixed  point  at  a  given  rate  of  interest.  The 
first  attempt  to  apply  mathematical  principles  to  life  annuities 
was  made  in  167 1  by  Jean  DeWitt,  grand  pensionary  of  Hol- 
land and  West  Friesland.  The  first  approximately  correct 
mortality  table  was  constructed  by  Dr.  Edmund  Halley  in  1693. 
As  these  tables  became  more  precise,  life  insurance  developed 
as  a  business.  The  first  enterprise  started  on  a  really  scientific 
basis  was  the  Equitable  Society  in  London  in  1762.  In  America 
the  first  society  was  the  New  York  Life  Insurance  and  Trust 
Company,  inaugurated  in  1S30. 

The  centre  of  marine  insurance  is  still  in  England.  But  with 
the  uncertainties,  the  vicissitudes  anil  the  magnitude  of  modern 
business  life  in  the  United  States,  the  American  life  insurance 
companies  have  far  transcended  all  others  in  importance.  Of 
the  amount  of  life  insurance  in  force  in  the  world  in  1905  four 
American  companies  —  the  Equitable  Life,  the  Mutual  Life, 
the  New  York  Life  and  the  Northwestern  ISIutual  Life  com- 
panies—  had  between  a  third  and  a  quarter  of  the  entire  amount. 
The  figures  are  as  follows: 

The  four  American  companies     ....  $5,680,316,147 
All  other  life  insurance  companies  in  the 

world .  $13,862,232,600 

Total $19,542,548,747 

Wherever  uncertainty  can  be  removed  we  find  insurance. 
In  addition  to  life,  fire  and  marine  insurance,  there  have 
developed  in  recent  years  cattle  insurance,  hail  insurance,  glass 
insurance,  windstorm  and  tornado  insurance  (first  in  America 
\n  186 1),  aqueduct  insurance  (against  the  risk  of  damage  from 
a  break  in  the  aqueduct  or  water  mains),  boiler  insurance, 
burglary    insurance,  elevator    insurance,    automobile    insurance, 


6o6  Insurance  [§  228 

credit  insurance  (through  the  credit  indemnity  companies), 
guaranty  insurance  (against  the  risk  of  breach  of  trust  by  offi- 
cials), accident  insurance,  illness  insurance,  out-of-work  insur- 
ance, old  age  insurance,  insurance  against  damages  to  others 
by  defects  in  the  insurer's  premises,  and  loss-of-rent  insurance. 
We  even  find  such  remarkable  examples  as  machine  insurance 
(against  the  risk  of  damage  through  the  carelessness  of  work- 
men), strike  insurance,  crop-failure  insurance,  gate-receipts 
insurance  (in  sporting  matches)  and  insurance  of  the  voice  of 
a  prima  donna.  In  Russia  there  is  a  company  which  insures 
individuals  against  the  economic  consequences  of  political  per- 
secution, and  in  England  and  America  there  has  even  been 
talk  of  insurance  against  divorce  and  insurance  against  twins. 

228.   Theory  of  Insurance 

The  essence  of  insurance  is  the  effort  to  diminish  the  risks 
of  uncertainty.  Insurance  is  productive,  that  is,  it  involves  an 
increase  of  wealth,  because  it  lessens  the  social  costs  of  risk. 

We  must  be  careful  not  to  confuse  the  loss  due  to  the  uncer- 
tainty with  the  loss  due  to  the  occurrence  itself.  The  occur- 
rence is  bound  to  happen.  Death  will  come,  fire  will  consume, 
the  tornado  will  strike.  In  some  cases  the  probability  of  the 
occurrence  or  the  amount  of  the  loss  may  indeed  be  some- 
what lessened  by  preventive  action.  A  good  police  force  will 
diminish  burglary;  an  efficient  fire  department  and  a  model 
building  code  will  decrease  fire  losses;  carefully  devised  factory 
laws  will  lessen  accidents.  In  all  these  cases,  however,  we  have 
to  deal  with  prevention,  not  with  insurance.  Insurance  takes 
the  fact  itself  for  granted;  it  does  nothing  to  eliminate  the 
occurrence.  The  loss  is  hence  the  same,  whether  we  have 
insurance  or  not;  the  house  is  burned  and  there  is  less  wealth 
than  before. 

There  is,  however,  in  every  case  an  additional  loss,  due  not 
to  the  occurrence  but  to  the  uncertainty.  This  can  be  most 
clearly  seen  in  the  investment  of  capital.     The  ordinary  man 


§  228]  Theory  of  Insurance  607 

will  not  assume  risks  unless  he  is  remunerated  for  it.  In  the 
case  of  the  entrepreneur,  indeed,  the  assumption  of  risk  is  one 
of  the  elements  in  enterprise,  because  he  expects  in  the  end  to 
derive  profits  sufficiently  large  to  compensate  for  possible 
immediate  losses.  But  when  a  capitahst  loans  funds,  and  there 
is  any  special  degree  of  risk  connected  with  the  transaction,  it 
is  a  familiar  fact  that  he  will  increase  the  rate  of  interest  by  a 
corresponding  amount.  This  increase  in  the  interest  rate  is  an 
addition  to  the  expenses  of  the  borrower.  If  the  risk  is  not 
peculiar  to  the  individual  borrower,  but  it  is  connected  with  the 
entire  class  of  transactions  in  question,  and  if  the  borrower 
utilizes  the  loan  in  productive  enterprises,  the  increase  in  the 
interest  rate  becomes  an  addition  to  the  cost  of  the  product 
and  thus  to  the  price  ultimately  charged  to  the  consumer.  In 
other  words,  if  the  uncertainty  could  be  eliminated,  the  price 
of  the  commodity  would  be  lower  and  there  would  be  a  corre- 
sponding gain  to  the  community  as  a  whole.  What  is  true  of  the 
investment  of  capital  is  true  of  the  employment  of  any  produc- 
tive factor.  Wherever  there  is  an  economic  action  —  whether 
it  be  the  application  of  labor,  the  employment  of  capital,  or  the 
utilization  of  any  form  of  wealth  —  uncertainty  results  in  a 
lower  degree  of  productivity  or  in  a  smaller  surplus  of  utility 
than  would  be  the  case  if  the  uncertainty  were  obviated  or 
decreased.  Insurance  minimizes  this  uncertainty  and  is  ac- 
cordingly productive  of  wealth. 

Like  transportation,  insurance  falls  under  the  head  of  ex- 
change of  wealth,  while  exchange,  as  we  know,  is  itself  a  species 
of  production.  Improved  transportation  reduces  the  cost  of  hav- 
ing a  commodity  in  one  place  become  a  more  valuable  commodity 
in  another  place;  improved  insurance  reduces  the  cost  of  having 
the  uncertainty  of  the  future  change  into  the  more  valuable  cer- 
tainty of  the  present.  Transportation  overcomes  the  disadvant- 
ages of  space;  insurance  overcomes  the  disadvantages  of  time. 
Transportation  is  productive  because  it  increases  space  utilities; 
insurance  is  productive  because  it  increases  time  utilities. 


6o8  Insurance  [§  228 

It  will  be  asked,  however,  how  does  insurance  minimize  un- 
certainty? The  answer  is,  through  the  combination  of  risks. 
This  is  a  result  of  the  law  of  probabilities.  If  we  have  accu- 
rate statistics  of  fires,  for  example,  for  a  term  of  years  and 
take  the  number  of  fires  with  a  given  number  of  houses  during 
that  period,  we  get  an  average.  If  the  figures  in  any  year 
corresponded  exactly  to  the  average,  there  would  be  a  cer- 
tainty in  the  number  of  fires,  and  the  only  uncertainty  would 
be  as  to  which  house  would  burn.  In  point  of  fact,  however, 
in  any  particular  year  there  will  be  a  variation  from  the  aver- 
age. According  to  a  well-established  law,  the  probable  varia- 
tion increases  only  as  the  square  root  of  the  number  of  cases. 
If  there  are  a  hundred  times  as  many  houses,  there  will  be  only 
ten  times  as  much  probable  variation  from  the  average  loss. 
Hence  the  larger  the  number  of  cases,  the  less  will  be  the  uncer- 
tainty as  to  the  amount  of  loss  which  will  be  borne  by  the  group 
as  a  whole.  Insurance  combines  the  risks  into  a  group,  and 
thus  reduces  the  element  of  uncertainty.  The  risk  of  the  group 
is  less  than  the  sum  of  the  risks  of  the  individuals  who  form 
the  group. 

An  individual  can  manifestly  not  afford  to  insure  himself, 
because  the  insurance  fund  which  he  would  be  obliged  to  accu- 
mulate would  be  out  of  all  proportion  to  his  possible  earnings. 
An  immense  corporation,  like  a  steamship  company  with  hun- 
dreds of  vessels,  may  practise  self -insurance  with  a  better  chance 
of  success;  but  the  advantages  of  having  the  insurance  business 
entrusted  to  a  separate  class  is  so  pronounced  that  self-insur- 
ance is  extremely  rare.  The  great  benefit  of  an  insurance 
company  is  not  only  that  the  risks  are  combined,  but  also  that 
they  are  transferred  to  a  class  who  can  afford  to  make  a  special 
study  of  the  problem,  and  who  can  thus  reduce  the  cost  of  in- 
surance by  displaying  their  ability  to  estimate  uncertainties. 
Whether  the  company  is  a  stock  corporation  or  a  mutual 
company  is  of  importance  only  as  to  the  ultimate  distribution 
of  the  profits  of  the  enterprise:    in  the  one  case,   as    in    the 


§  22g]  Regulation  of  Insurance  609 

other,  however,  the  management  of  the  l)usiness  is  confided 
to  a  class  of  experts.  The  more  adept  the  insurance  com- 
panies, and  the  more  scientific  their  methods,  the  closer  will 
be  the  correspondence  between  the  preparation  for,  and  the 
fact  of,  loss  and  the  smaller  will  be  the  accumulation  of  the 
necessary  insurance  fund,  the  lower  will  be  the  insurance  pre- 
mium, and  the  greater  will  be  the  net  gain  to  the  community. 
Insurance  properly  conducted  is  the  opposite  of  gambling.  If 
any  one  takes  out  an  insurance  policy,  he  frees  himself  from 
an  existing  uncertainty  and  transfers  the  risk  to  some  one  who 
is  more  qualified  and  ready  to  assume  it;  if  he  makes  a  wager 
with  another,  the  newly  created  uncertainty  attaches  to  both. 
Insurance  is  the  transfer  and  reduction  of  risk;  gambling  is  the 
creation  and  increase  of  risk. 

229.   Methods  and  Regulation  of  Insurance 

The  primary  function  of  the  insurance  company  is  to  reduce 
uncertainty.  Insurance  companies  as  business  enterprises, 
however,  seek  to  enlarge  their  profits  in  other  w-ays. 

(i)  Sometimes  insurance  companies  endeavor  to  combine 
the  business  of  insurance  and  of  prevention.  Strictly  speak- 
ing, the  insurance  premium  is  the  payment  made  to  the  com- 
pany to  induce  it  to  assume  the  risk.  But  fire  insurance 
companies,  for  instance,  conduct  the  fire-patrol  system,  and 
organize  for  protecting  coverings  in  case  of  fire;  and  the  cost 
of  this  is  added  to  the  insurance  proper  and  is  included  in  the 
so-called  premium.  In  reality,  however,  as  we  have  seen,  this 
is  prevention,  not  insurance:  it  tends  to  reduce  the  loss  through 
the  occurrence,  not  the  uncertainty  of  the  occurrence.  In  the 
same  way  certain  fire  insurance  companies  make  a  lower  rate 
when  the  insurer  engages  to  use  certain  precautions,  like  better 
buildings,  automatic  fire-sprinklers,  etc.  This  again  is  no 
insurance,  but  prevention. 

(2)  Life  insurance  companies  do  an  immense  business  not 
alone  as  insurance  companies  but  as  media  of  secure  invest- 
39 


6 1  o  Insurance  [§  229 

ment.  As  a  consequence  there  is  a  great  variety  in  the  kinds 
of  policies  issued.  The  ordinary  form  is  the  annual  dividend 
policy.  Here,  by  the  time  the  second  annual  premium  is  pay- 
able by  the  policy  holder,  a  dividend  is  declared  on  the  policy. 
This  may  take  the  form  of  a  "reversionary  addition"  which  is 
added  to  the  amount  of  the  insurance,  the  premium  remaining 
the  same;  or  it  may  be  a  "cash  dividend,"  necessarily  smaller, 
which  can  be  used  to  reduce  the  premium,  the  amount  of  the  in- 
surance remaining  the  same.  With  every  year  this  dividend 
grows,  and  after  the  lapse  of  several  years  the  policy  acquires  a 
"cash  surrender  value,"  that  is,  a  sum  which  the  company  will 
pay  to  the  holder  on  the  surrender  of  the  policy.  In  lieu  of 
the  annual-dividend  policy,  the  holder  may  prefer  a  deferred- 
dividend  policy,  according  to  which  a  cash  sum  or  its  equivalent 
will  be  paid  at  the  end  of  a  term  of  years.  Thirdly,  he  may 
choose  a  policy  without  any  dividends  at  aU,  the  so-called 
non-participating  policy,  under  which  he  obtains  his  insurance 
at  a  lower  rate  in  consideration  of  the  fact  that  he  waives  all 
claims  to  dividends.  Again,  the  policy  may  be  either  a  life 
policy  payable  upon  his  death  or  an  endowment  policy,  whereby 
the  insurance  is  payable  to  the  beneficiary  at  the  expiration  of 
a  certain  period.  These  endowment  policies  may,  like  the 
others,  be  issued  either  on  the  annual-dividend  or  the  deferred- 
dividend  plan.  Finally,  the  policy  may  be  a  term  policy  or 
a  limited-payment  life  policy,  where  the  premiums  do  not  con- 
tinue for  life,  but  are  limited  to  a  definite  number  of  years, 
after  which  the  policy  becomes  "paid  up"  and  remains  in 
statu  quo  until  the  death  of  the  insured.  Moreover,  there 
may  be  all  manner  of  combinations  of  these  various  kinds  of 
policies,  such  as  continuous-instalmcnt-endowment,  yearly- 
renewable-term,  return  premium,  and  double-endowment 
policies. 

It  is  especially  in  such  cases  as  this,  where  the  accumulated 
surplus  becomes  so  enormous,  that  the  wider  problem  of  public 
policy  assumes  considerable  importance.     In  the  case  of  banks, 


§  229]  Regulation  of  Insurance  611 

as  we  know,  legislation  is  needed  to  protect  the  reserve.  In 
the  case  of  insurance,  which  is  primarily  a  method  of  making 
accumulations  to  protect  the  great  mass  of  beneficiaries,  the 
need  of  regulation  is  even  more  obvious.  Almost  all  of  the 
American  states  have  a  legislative  code  and  an  administrative 
department  designed  to  control  the  various  classes  of  insurance 
companies. 

The  recent  scandals  connected  with  the  financial  manage- 
ment of  the  leading  insurance  companies  in  the  United 
States,  have  emphasized  the  necessity  of  a  more  carefully 
devised  legislation  and  a  more  effective  supervision  calculated 
to  enforce  responsibility  and  to  guarantee  solvency.  In  some 
countries,  as  in  Australia,  the  public  is  so  solicitous  of  the  in- 
terests of  the  policy  holders  that  the  government  has  even 
assumed  the  management  of  the  insurance  business,  at  least  in 
part.  Some  of  the  American  commonwealths,  like  Wisconsin, 
have  also  made  a  similar  beginning  in  the  state  provision  for 
life  insurance.  Radical  as  such  a  step  may  seem,  it  is  at  all 
events  indisputable  that  there  is  both  room  and  need  for 
careful  public  scrutiny  and  effective  social  supervision  of  a 
business  that  has  intertwined  itself  with  the  very  roots  of 
modern  economic  life. 

In  the  above  exposition  we  have  only  rarely  alluded  to  one 
group  of  insurance  which  represents  social  policy  rather  than 
business  interests,  and  which  is  primarily  applicable  to  the  great 
mass  of  the  working  population  —  namely  so-called  social  in- 
surance. This  is  so  important  that  we  must  assign  to  it  a  sepa- 
rate discussion  (chapter  xxxviii). 


Part  IV 

Government  and  Wealth 


CHAPTER  XXXV 
SOCIALISM  AND   PUBLIC  OWNERSHIP 

230.   References 

Socialism:  T.  Kirkup,  History  of  Socialism  (3,  1906);  J.  Rae,  Con- 
temporary Socialism  (1908);  A.  E.  F.  Schaeffle,  The  Qmntessence  of 
Socialism  (1889);  W.  Sombart,  Socialism  and  the  Social  Movement  in  the 
Nineteenth  Century  (1909);  O.  D.  Skelton,  Socialism,  a  Criticism  and 
Analysis  (1911);  M.  Beer,  History  of  English  Socialism  (1919);  W.  E. 
Walling,  Socialism  as  it  is  (191 2)  and  The  Larger  Aspects  of  Socialism 
(1913);  E.  V.  Zenker,  Anarchism,  A  Criticism  and  History  (1898); 
J.  Spargo,  Socialism  (1910);  M.  Hilquitt,  History  of  Socialism  in  the 
United  States  (1903)  and  Socialism  in  Theory  and  Practice  (1909);  V.  G. 
Simkohvitch,  Marxism  and  Socialism  (191 2);  E.  Bohm-Bawerk;  Marx 
and  the  Close  of  his  System  (1891);  J.  W.  Hughan,  The  Facts  of  Socialism 
(1913);  J.  G.  Brooks,  American  Syndicalism:  the  I.  W.  W.  (1913); 
L.  Levine,  Syndicalism  in  France  (Columbia  Series,  1914);  R.  F.  Bris- 
senden.  The  L.  W.  W.  {Ibid.,  1919). 

Public  Ownership:  H.  C.  Adams,  The  Relation  of  the  State  to  In- 
dustrial Action  (Am.  Economic  Association,  Publications,  I,  1886);  E.  W. 
Bemis,  ed..  Municipal  Monopolies  (1899);  Major  Darwin,  Municipal 
Trade  (1904);  B.  Shaw,  The  Common  Sense  of  Municipal  Trading  (1904); 
The  Facts  of  Municipal  Ownership,  Report  of  the  Commission  of  the 
National  Civic  Federation  (3  vols.,  1907);  D.  F.  Wilcox,  Municipal 
Franchises  (2  vols.,  1910-11). 

Subsidies:  R.  Meeker,  History  and  Theory  of  Shipping  Subsidies 
(1905);  W.  W.  Bates,  The  American  Merchant  Marine  (1902);  F.  R. 
Rutter,  The  International  Sugar  Situation  (1905);  R.  G.  Blakey,  The 
Beet  Sugar  Industry  and  the  Tarif  (1912). 

231.   Socialism 

Government  was  devised  in  large  measure  to  afford  protec- 
tion and  to  subserve  the  economic  interests  of  the  community. 

6l2 


§  23i]  Socialism  613 

From  the  very  outset  therefore  more  or  less  influence  was  ex- 
erted by  the  constituted  authorities  on  the  progress  of  wealth. 
While  the  state,  however,  has  always  participated  in  economic 
life,  there  have  been  two  opposing  theories,  neither  realized 
in  practice,  but  both  nevertheless  advanced  as  ideals  toward 
which  human  effort  should  be  directed. 

On  the  one  hand  we  have  the  advocates  of  laissez-faire. 
Their  programme  is  "hands-off,"  and  their  aspiration  is  to 
reduce  the  function  of  government  to  the  narrowest  possible 
limits.  The  logical  conclusion  of  such  a  theory  is  anarchy  or 
no  government.  For  even  if  we  accept  the  "policeman  the- 
ory" of  the  state,  —  the  doctrine  that  government  is  instituted 
only  to  protect  liberty  and  property,  —  it  is  obvious  (as  was 
pointed  out  in  chapter  xi)  that  protection  involves  some  re- 
straint on  the  liberty  of  others.  If,  therefore,  restraint  or  in- 
tervention is  to  be  completely  abolished,  there  must  be  no 
restrainer,  that  is,  no  government.  While  we  may  reasonably 
object  to  the  ordinary  anarchist  who  illogically  uses  violence 
in  order  to  bring  about  the  absence  of  compulsion,  the  theoret- 
ical anarchists  like  Tolstoi  and  Kropotkin  in  Russia,  Proudhon 
and  Reclus  in  France,  Warren  and  Tucker  in  America,  are  true 
to  their  premises.  If  we  are  to  have  no  immixture  of  govern- 
ment in  the  economic  life  of  the  individual,  it  must  be  con- 
ceded that  the  only  sure  means  of  compassing  the  desired  end 
is  to  abolish  government. 

At  the  opposite  pole  are  to  be  found  those  thinkers  who 
discover  the  root  of  all  economic  evil  in  private  property. 
Here,  again,  the  logical  conclusion  is  that  of  communism,  the 
entire  sinking  of  individual  property  rights  in  those  of  the 
group.  This  is,  however,  so  manifestly  opposed  to  the  consti- 
tution of  human  nature  that  the  idea  has  remained  a  counsel 
of  perfection.  Every  communistic  experiment  has  been  more 
or  less  short-lived.  Less  thorough-going  but  almost  equally 
ideal  is  socialism,  which  is  willing  to  admit  private  property  in 
consumption,  but   demands  a  community  of  production,  that 


6 14      Socialism  and  Public  Ownership     [§231 

is,  the  assumption  by  organized  society  of  all  the  means  of  pro 
duction.     According  to  the  "scientific  socialists"  private  prop- 
erty in  the  means  of  production  is  an  anachronism. 

While  socialistic  theories  are  almost  as  old  as  economic 
speculation  itself,  it  is  only  since  the  advent  of  the  modern  in- 
dustrial system  that  socialism  has  taken  a  deep  hold  on  the 
mass  of  men.  This  is  obviously  due  to  the  fact  of  the  prodigious 
increase  of  wealth,  coupled  with  the  triumphant  march  of  de- 
mocracy, —  both  of  them,  as  we  know,  the  results  of  industrial 
capitalism  and  the  factory  system.  The  unlocking  of  the  secrets 
of  nature,  the  conquests  of  new  worlds,  and  the  vast  opportu- 
nities opened  to  private  initiative  have  made  this  the  era  of 
individualism.  The  hardy,  the  venturesome  and  the  conspicu- 
ously able,  together  with  the  adroit,  the  fortunate  and  the  occa- 
sionally unscrupulous,  have  hailed  the  advent  of  these  well-nigh 
limitless  chances  to  forge  ahead,  with  but  scant  regard  to  the 
coincidence  between  their  interests  and  those  of  others.  The 
Anglo-Saxon  "Each  for  himself,  and  the  devil  take  the  hind- 
most," like  the  Romanic  "God  helps  him  who  helps  himself," 
has  been  the  watchword  of  modern  economic  life. 

In  contrast  to  this  idea  is  to  be  noticed  the  solidification  of 
a  wage-earning  class,  now  definitely  separated  from  the  owner- 
ship of  the  tools  of  production.  Their  very  progress  to  a  more 
human  standard  of  life  has  made  them  painfully  conscious 
of  the  inequalities  of  wealth  and  opportunity,  of  crying  social 
evils  and  miscarriages  of  justice,  and  of  the  seizure  by  indi- 
viduals of  much  that  seems  to  them  the  national  heritage.  In- 
stead of  being  the  voice  of  envy  and  confiscation,  as  it  often 
appears  to  the  smug,  the  sleek  and  the  contented,  socialism  is 
to  the  elect  few  an  inspiring  ideal  and  a  veritable  religion; 
while  in  the  case  of  the  mass  it  is  an  inarticulate  cry  of  anguish 
and  a  vague  expression  of  the  demand  for  social  progress. 

Yet  with  all  its  inspired  ideals  socialism  is  as  one-sided  as 
anarchism.  If  anarchism  forgets  the  state,  socialism  forgets 
the  individual.     If  anarchism   exaggerates   the  possibilities  of 


§232]  Public  Ownership  615 

private  action,  socialism  exaggerates  those  of  public  action. 
The  economic  theory  of  "scientific  socialism"  is,  as  we  have 
repeatedly  seen,  completely  erroneous.  It  starts  out  with  the 
defective  labor  theory  of  value;  it  unjustifiably  restricts  labor 
to  manual  labor;  it  misconceives  the  theory  of  profits;  and  it 
erects  into  a  veritable  fetish  the  doctrine  of  class  conflict.  So- 
cialism as  a  movement,  however,  is  not  bound  up  with  any  such 
scientific  or  unscientific  theories.  Practical  discontent,  not  sci- 
entific formulas,  has  engendered  modern  socialism;  to  Lassalle 
and  not  to  Marx  must  be  ascribed  the  real  paternity  of  social- 
ism as  a  practical  movement. 

In  his  anxiety  to  escape  from  the  evils  of  the  present,  the 
socialist  is  willing  to  entrust  himself  to  the  fortunes  of  a  dubious 
future.  Impatient  of  the  shortcomings  of  distribution,  he  does 
not  realize  that  his  scheme  will  endanger  production.  Desir- 
ous of  eliminating  profits,  he  does  not  see  that  he  will  stifle 
progress.  In  his  effort  to  remove  actual  inequalities  he  bids 
fair  to  reduce  economic  life  to  the  hopeless  level  of  a  dull  and 
low  uniformity.  With  human  nature  as  it  exists  at  present, 
and  as  it  bids  fair  to  continue  for  an  incalculable  future,  social- 
ism, if  ever  realized  in  practice,  as  at  present  in  Russia,  would  be 
the  death  knell  of  economic  advance  and  true  social  betterment. 

232.   Development  of  Public  Ownership 

To  affirm,  however,  that  socialism,  or  the  assumption  by 
government  of  all  the  means  of  production,  is  theoretically  in- 
defensible and  practically  injurious,  does  not  imply  that  the 
government  must  refrain  from  assuming  any  of  the  means  of 
production.  If  there  are  any  criteria  by  which  to  distinguish 
between  different  kinds  of  enterprises,  it  is  possible  to  advo- 
cate government  ownership  in  some  cases  without  incurring 
the  imputation  of  socialism,  or  involving  the  necessary  accept- 
ance of  government  ownership  in  other  cases. 

It  may  be  laid  down  in  general  that  there  are  three  con- 
ditions of  government  ownership.     The  government  must  do 


6i6       Socialism  and  Public  Ownership    [§2321 

what  the  private  individual  cannot  do,  will  not  do  and  ought 
not  to  do.  Private  enterprise  can,  for  instance,  no  longer 
provide  an  army  or  a  navy.  Again,  private  enterprise  was  not 
willing  to  construct  the  first  New  York  subway.  Finally,  it  is 
universally  agreed  that  such  matters  as  justice  and  police  pro- 
tection ought  not  to  be  left,  as  formerly,  to  private  individuals. 
There  i-s,  however,  still  a  large  fringe  of  occupations  where 
there  is  an  opportunity  of  discussion  as  to  whether  private  in- 
dividuals ought  to  be  permitted  to  carry  on  the  enterprise.  It 
is  in  this  fringe  that  the  modern  problem  of  government  owner- 
ship has  arisen. 

Government  enterprise  in  such  occupations  may  be  divided 
into  fiscal  and  social  monopolies.  The  government  may  decide 
to  monopolize  a  business  for  purely  fiscal  reasons.  In  the  case 
of  certain  raw  materials  or  easily  manufactured  articles  of  wide 
consumption  which  readily  lend  themselves  to  the  purposes  of 
taxation,  the  government  may  prefer  to  conduct  the  operation 
itself  and  to  enjoy  the  monopoly  profits.  Thus  some  of  the 
European  governments  have  a  monopoly  of  the  sale  or  sometimes 
of  both  the  sale  and  the  manufacture  of  tobacco.  In  others 
we  find  a  government  monopoly  of  salt,  and  in  the  Eastern 
countries  we  find  monopolies  of  opium,  of  tin  and  of  other 
commodities.  The  monopoly  of  spirits,  however,  as  in  Russia, 
Switzerland  and  up  to  1907  in  South  Carolina,  is  only  partly 
fiscal  in  character. 

A  consideration  of  fiscal  monopolies  belongs  properly  to  the 
science  of  finance.  It  may  be  said,  nevertheless,  that  in  the 
most  progressive  countries  fiscal  monopolies  are  not  desirable, 
because  the  government  at  best  secures  as  revenue  only  the 
surplus  between  cost  and  selling  price,  while  in  the  case  of  pri- 
vate competition  there  would  be  a  tendency  for  cost  to  fall. 
In  the  former  case,  therefore,  the  public  really  loses  more 
than  the  government  receives,  while  in  the  latter  case  the 
government  may  secure  the  same  revenue  through  indirect 
taxation,  and  the  price  of  the  product  to  the  consumer  ^yill 


§232]  Public  Ownership  617 

nevertheless  be  lower.  When  the  political  objections  to  a  high 
indirect  tax,  however,  seem  considerable,  or  when  the  chances 
of  private  competition  are  increasingly  remote,  it  may  be  wise 
to  secure  the  desired  revenue  by  fiscal  monopoly. 

Some  fiscal  monopolies,  indeed,  are  no  longer  tolerated  by 
public  opinion.  This  is  in  general  true  of  lotteries,  which 
were  extensively  employed  in  former  times:  especially  in 
America  many  churches  and  educational  institutions  were 
started  through  this  agency.  Government  lotteries  were  prob- 
ably based  on  the  quaint  defence  of  Petty  in  the  seventeenth 
century:  "A  lottery  is  properly  a  tax  upon  unfortunate  self- 
conceited  fools.  The  world  abounds  in  such  fools;  it  is  not 
fit  that  every  man  that  will  may  cheat  every  man  that  would 
be  cheated.  Rather  it  is  ordained  that  the  Sovereign  should 
have  guard  of  these  fools,  even  as  in  the  case  of  lunatics  and 
idiots."  Nowadays,  by  a  revulsion  of  popular  feeling,  not  only 
public,  but  private,  lotteries  have  disappeared  in  Anglo-Saxon 
countries.  The  continuance  of  the  government  lottery  in 
southern  Europe  and  in  even  so  enlightened  a  country  as  Prussia 
is  as  surprising  as  it  is  deplorable. 

Contrasted  to  the  fiscal  monoplies  of  government  are  the 
social  monopolies,  that  is,  enterprises  which  are  undertaken 
by  government  for  general  social  reasons.  If  we  look  at  the 
existing  examples  of  government  ownership,  we  shall  find  that 
they  may  be  included  under  the  following  heads: 

I.  Transfer  of  values:  (i)  Coinage;  (2)  Non-Metallic  Money; 
(3)  Banking. 

II.  Transfer  of  Products:  (i)  Markets;  (2)  Docks  and 
Piers. 

III.  Transmission  of  Intelligence:  (i)  Post-Office;  (2)  Tele- 
graph; (3)  Telephone. 

IV.  Transportation  of  Persons  and  Freight:  (i)  Roads; 
(2)  Canals;  (3)  Ferries;  (4)  Bridges;  (5)  Railroads;  (6)  Ex- 
press Companies. 

V.  Transmission  of   Utilities  and   Power:     (i)    Waterworks; 


6i8       Socialism  and  Public  Ownership     [§232 

(2)  Gas  and  Electric  Light  Works;  (3)  Electric  Power  Works; 
(4)  Steam-Heat  and  Hot- Water  Lines;  (5)  Irrigation  and 
Power  Canals. 

What  is  common  to  all  these  enterprises  is  that  they  are  of 
fundamental  social  importance,  and  either  lie,  or  may  lie,  at  the 
basis  of  general  industry.  This  is,  in  fact,  the  criterion  which 
distinguishes  them  from  ordinary  occupations,  —  the  existence 
of  a  sufficiently  widespread  common  interest  and  public  im- 
portance to  warrant  their  assumption  by  the  government 
authorities.  This  interest  and  importance  did  not  always  ex- 
ist, do  not  everywhere  exist  at  present,  and  are  not  found  in 
the  same  degree  in  the  various  occupations  or  countries.  With 
wide  variations  in  detail,  we  can  trace  a  general  law  of  develop- 
ment, in  five  stages: 

(i)  Everywhere  at  first  all  of  the  above  enterprises  are  in 
private  hands,  and  are  used  for  purposes  of  profit  and  some- 
times of  extortion,  like  the  highways,  the  coinage  and  the  post 
offices  of  mediaeval  Europe,  or  the  early  bridges,  canals  and 
markets. 

(2)  In  the  next  stage  they  are  "affected  with  a  public 
interest"  and  are  turned  over  to  trustees  who  are  permitted  to 
charge  fixed  tolls,  but  who  are  required  to  keep  the  service  up 
to  a  certain  standard.  This  was  the  era  of  the  canal  or  turn- 
pike trusts  and  companies. 

(3)  In  the  subsequent  stage  the  government  assumes  the 
business,  but  manages  it  for  profit,  as  is  still  the  case  in  some 
countries  with  the  postal  and  railway  systems. 

(4)  In  the  fourth  stage  the  government  charges  tolls  or  fees 
to  cover  expenses  only,  as  was  recently  true  of  canals  and 
bridges,  and  as  is  the  theory  of  the  postal  system  and  municipal 
water  supply  in  America  to-day. 

(5)  In  the  final  stage  the  government  reduces  charges  until 
finally  the  service  is  free  and  the  expenses  are  defrayed  by  a 
general  tax  on  the  community.  This  is  the  stage  now  reached 
in  the  common  roads,  in  the  coinage,  in  most  of  the  canals 


§233]    Conditions  of  Public  Ownership       619 

and  bridges,  and  which  has  been  seriously  proposed  by  officials 
of  several  American  cities  for  other  services,  like  the  water 
supply. 

It  is  obvious,  however,  that  many  of  the  industries  referred 
to  have  not  gone  through  the  whole  of  this  evolution,  and  that 
some  of  them  still  remain  in  the  first  stage.  It  is  also  clear 
that  where  we  find  other  isolated  examples  of  government 
ownership,  as  in  the  case  of  powder  mills  or  shipyards  or  ord- 
nance factories  or  even  in  the  insurance  business  and  frozen-meat 
transportation  of  Australasia,  we  must  ascribe  them  to  the 
sense  of  the  overwhelming  public  importance  of  the  enterprise 
and  the  inadequacy  or  proven  unfitness  of  private  individuals 
to  conduct  them.  What,  then,  are  the  reasons  that  weigh 
with  some  communities  in  inducing  them  to  permit  industries 
of  paramount  public  importance  to  remain  in  private  hands? 

233.    Conditions  of  Public  0"wnership 

The  three  conditions  which  must  be  carefully  weighed  before 
government  ownership  and  management  of  any  industry  are 
decided  upon  are:  (i)  the  simplicity  or  complexity  of  the 
enterprise;  (2)  the  amount  of  capital  invested;  and  (3)  the 
effectiveness  or  ineffectiveness  of  social  control. 

In  the  case  of  the  industries  included  on  page  617  under 
the  head  of  transfer  of  values  there  is  comparatively  little,  dis- 
cussion. The  coinage  of  money  is  now  everywhere  conceded 
to  be  a  public  function.  In  the  case  of  the  banking  business, 
however,  which  is  far  more  complex,  calls  for  a  large  capital 
and  is  easily  made  amenable  to  pubhc  control,  the  decision  is 
clearly  in  favor  of  private  ownership.  The  only  moot  question 
is  as  to  whether  the  paper  currency  should  be  issued  by  private 
banks  or  by  the  government.  The  decision  of  this  question  is, 
as  we  have  seen,  largely  dependent  upon  political  conditions. 

Coming  to  the  industries  mentioned  under  the  second  head, 
it  is  to  be  noted  that  the  markets,  which  in  the  middle  ages 
were  almost  exclusively  private,  are  now  generally  in  public 


620      Socialism  and  Public  Ownership     [§  233 

hands.  In  England  as  elsewhere  in  Europe  the  vested  rights 
of  individuals  in  the  markets  are  being  bought  out  by  the  local 
corporations.  In  America  the  large  provision  markets  are  fre- 
quently owned  by  the  cities,  and  yield  a  substantial  income. 
In  the  case  of  the  docks  and  piers,  much  the  same  develop- 
ment has  taken  place.  In  America  the  progress  has  not  been 
so  rapid  as  abroad,  but  in  cities  like  New  York  the  municipali- 
zation of  the  water  front  is  leading  to  a  great  increase  of  facili- 
ties as  well  as  of  public  revenue. 

When,  however,  we  come  to  the  last  three  classes  in  the 
schedule,  we  reach  burning  problems.  In  a  few  of  the  sub- 
divisions, indeed,  the  controversy  has  been  laid  to  rest.  For 
instance,  in  the  case  of  the  common  highways  the  process  is 
about  complete  and  the  private  turnpike  companies  have  well 
nigh  disappeared.  In  certain  rural  sections  there  is  still  some 
debate  as  to  whether  the  roads  should  be  toll  roads  or  free  high- 
ways, but  in  general  it  may  be  said  that  the  discussion  is 
a  thing  of  the  past. 

The  same  is  true  in  the  main  of  bridges  and  canals.  The 
old  private  canals  have  almost  entirely  vanished,  and  it  is  only 
about  a  quarter  of  a  century  ago  that  canal  tolls  were  abolished 
on  the  Erie  Canal.  In  the  case  of  ferries  a  similar  development 
is  to  be  noted;  in  Boston  and  New  York  City  the  process  of 
municipalization  is  proceeding  apace. 

The  same  considerations  apply  to  the  fourth  class  of  indus- 
tries. Everybody,  with  the  exception  of  extreme  individualists 
like  Herbert  Spencer,  is  agreed  that  the  post-office  should  be 
in  public  hands.  The  amount  of  capital  invested  is  insignifi- 
cant, nothing  being  needed  but  the  sites  and  buildings  and  a 
few  simple  devices  for  stamping  and  transporting  the  letters; 
the  management  also  is  comparatively  simple.  Yet  even  in 
the  post-office  it  is  a  notorious  fact  that  government  manage- 
ment is  more  costly  than  private  management.  An  American 
postmaster-general  once  stated  that  if  he  were  at  the  head  of 
a  private  company  he  could  perform  the  postal  business  about 


§233]    Conditions  of  Public  Ownership       621 

one-fourth  cheaper,  by  a  more  effective  administration  and 
consolidation  of  post-oiJ&ces,  which  is  now  impossible  because  of 
political  conditions. 

Nevertheless,  no  one  would  think  of  abandoning  the  govern- 
ment postal  service.  The  only  controversy  arises  over  what  are 
in  other  countries  ancillary  features  of  the  service.  Such,  for 
instance,  is  the  parcels  post.  Almost  everywhere,  except  until 
very  recently  in  the  United  States,  this  is  a  well-recognized 
postal  function;  here,  however,  the  private  express  companies 
were  so  firmly  intrenched  that  it  was  not  until  1913  that  the 
parcels  post  was  introduced.  All  the  arguments  in  favor  of  a 
letter  post  apply  almost  equally  well  to  a  parcels  post. 

In  the  case  of  the  telegraph  practically  the  same  is  true. 
The  investment  of  capital  is  indeed  somewhat  greater  than  in 
the  case  of  the  post,  but  it  is  still  insignificant  as  compared 
with  other  interests,  while  the  complexity  of  management  is 
likewise  slight.  In  every  other  country  in  the  world,  including 
England,  Australasia  and  Switzerland,  the -telegraph,  although 
frequently  starting  out  in  private  hands,  has  been  brought 
under  government  management.  In  the  United  States,  in 
fact,  the  telegraph  began  as  a  government  business  in  1844, 
and  was  abandoned  chiefly  because  the  postmaster-general  at 
that  time  erroneously  thought  that  it  would  prove  a  dire  fail- 
ure, and  did  not  desire  to  commit  the  government  to  a  haz- 
ardous experiment.  Yet  the  originator  of  the  telegraph,  who 
was  wise  enough  to  appreciate  the  final  outcome,  did  not  con- 
ceal his  opinion  that  it  ought  to  form  a  natural  adjunct  to  the 
government  post-office. 

The  chief  reason  why  there  is  not  a  louder  outcry  for  a  govern- 
ment telegraph  is  that  the  abuses  of  the  private  telegraph 
are  not  important.  On  the  other  hand,  it  must  not  be  for- 
gotten that  while  postal  rates  are  lower  here  than  abroad,  tele- 
graph rates  are  much  higher,  for  short  as  well  as  for  long  dis- 
tances. The  use  of  the  telegraph  service  in  the  United  States 
is  accordingly  far  slighter  than  in  England  or  France.     Every 


622       Socialism  and  Public  Ownership     [§233 

argument  in  favor  of  government  post  applies  almost  equally 
to  the  telegraph. 

In  the  case  of  the  telephone  the  situation  is  a  little  different. 
The  complexity  of  management  is  indeed  slightly  greater  than 
in  the  telegraph,  and  it  requires  somewhat  more  care  to  keep  up 
to  the  level  of  modern  science.  Nevertheless  the  difference  is 
not  material.  Most  countries  have  nationalized  their  telephone 
system,  and  even  in  England,  where  the  private  telephone  was 
at  first  in  complete  control  of  the  field,  it  was  taken  over  in 
191 1  by  the  government.  But  while  under  government  man- 
agement abroad  telephone  rates  are  in  some  cases  lower  than 
in  the  United  States,  the  efficiency  of  management  abroad 
cannot  be  compared  with  that  in  the  United  States.  The 
choice  is  really  one  between  low  government  rates  coupled 
with  poor  service  and  high  private  rates  accompanied  with 
good  service. 

While  the  arguments  hitherto  advanced  would  lead  to  govern- 
mental assumption-  of  the  telegraph  and  in  a  less  degree  to 
that  of  the  telephone,  they  would  lead  to  precisely  the  opposite 
conclusion  in  the  case  of  railways.  There  are,  in  fact,  three 
sets  of  arguments  against  government  railways,  —  the  economic, 
the  fiscal  and  the  political  argument. 

(i)  The  railway  is  the  most  stupendous  of  modern  industries. 
Not  only  is  the  capital  account  enormous,  but  the  railway 
business  calls  for  the  most  delicate  handling,  and  must  needs 
pay  for  the  highest  possible  business  ability.  Railway  presi- 
dents of  single  lines  to-day  receive  salaries  superior  to  that 
of  the  President  of  the  United  States;  for  without  consum- 
mate capacity  the  attempt  to  run  a  railway  would  be  a  failure. 
The  time  may  come  in  the  distant  future  when  democracy 
will  be  willing  to  pay  higher  salaries,  and  when  the  ablest  men 
will  be  ready  to  give  up  comfort  and  wealth  for  the  more  ideal 
end  of  serving  the  public.  Under  present  conditions  in  the 
United  States,  however,  to  turn  over  the  greatest,  the  most 
complex  and  the  most  fundamental  industry  of  modern  times 


§  234]  Municipal  Monopolies  623 

to   the  government   would   inevitably  lead   to   such  a  decrease 
in  efficiency  as  to  become  well-nigh  intolerable. 

(2)  The  revenues  of  our  railways  were,  before  the  Great  War, 
about  triple  those  of  the  government.  The  entire  budget  would 
then  depend  upon  the  temporary  prosperity  or  ill  fortune  of  the 
railway  system.  In  bad  times  the  railway  revenues  shrink  by 
tens  or  even  hundreds  of  millions.  This  would  so  embarrass 
the  income  side  of  the  national  budget  as  to  necessitate  a  com- 
plete revolution  not  only  in  our  tax  system,  but  also  in  our 
entire  budgetary  methods.  This  point,  hitherto  almost  com- 
pletely overlooked,  would  in  itself  suffice  to  defeat  the  scheme 
for  government  railways. 

(3)  In  comparison  with  railway  charges  within  the  country, 
tariff  rates  into  the  country  are  of  slight  importance.  The 
political  demoralization  that  occurs  whenever  a  new  tariff  is 
framed  is  familiar  to  all.  The  imagination  shrinks  from  the 
thought  of  what  would  happen  in  the  United  States  if  the  nec- 
essarily continuous  manipulation  of  railway  rates  were  entrusted 
to  the  tender  mercies  of  the  legislature,  or  of  an  administrative 
body  under  its  immediate  influence. 

These  arguments  against  government  railways  in  the  United 
States  do  not  of  course  imply  that  the  railways  should  be  let 
alone.  Social  control  of  private  railways,  however,  has  as  yet 
scarcely  begun,  and  until  the  ineffectiveness  of  social  control 
has  been  affirmatively  proven  it  would  be  rash  in  the  extreme 
to  plunge  into  government  ownership. 

234.   Municipal  Monopolies 

There  still  remain  for  discussion  the  fifth  class  of  businesses 
mentioned  on  page  617.  It  will  be  observed  that  with  the 
exception  of  the  last  item  they  have  two  points  in  common: 
they  are  local  enterprises  and,  because  they  depend  on  the 
use  of  the  streets  which  cannot  be  continually  torn  up,  they 
tend  to  become  monopolies.  It  is  for  these  reasons  that  they 
are  usually  called  municipal  monopolies,  or  public  utilities;   and 


624      Socialism  and  Public  Ownership     [§  234 

because  of  these  facts  the  street  railways  or  omnibus  lines  are 
ordinarily  included  in  the  same  category. 

In  the  United  States  municipal  ownership  has  been  common 
in  the  case  of  waterworks,  somewhat  less  usual  in  electric 
lighting,  rare  in  gas  works,  and  only  just  beginning  in  street 
railways.  In  Great  Britain,  on  the  other  hand,  waterworks 
have  ordinarily  been  in  private  hands,  but  gas  works  to  a  large 
extent  under  municipal  control,  while  of  late  there  has  been 
a  marked  tendency  toward  municipal  tramways  and  electric 
lines.  In  1902,  for  instance,  there  were  118  municipal  tram- 
ways with  85s  miles  of  track,  as  compared  to  115  private  tram- 
ways with  598  miles  of  track.  In  the  United  States,  in  1902, 
fifty-three  per  cent  of  all  waterworks  were  in  the  hands  of  the 
public,  and  in  cities  of  over  8,000  population  the  waterworks 
were  owned  by  the  municipalities  in  135  cases,  by  private  com- 
panies in  only  36  cases;  whUe  the  gas  works  were  owned  by 
the  cities  in  only  5  cases,  by  private  companies  in  130  cases. 
At  the  same  date  only  13  cities  owned  their  electric  lighting 
plant.  The  chief  examples  of  municipal  street  railways  in  1914 
were  the  New  York  and  Boston  subways,  and  the  electric  surface 
railways  in  Seattle,  San  Francisco,  Detroit  and  Bay  City. 

In  the  case  of  the  water  supply  the  arguments  are  decidedly 
in  favor  of  municipal  ownership.  The  social  interests  are  of 
the  most  commanding  importance,  and  there  is  the  utmost 
simplicity  of  management.  When  the  watershed,  the  aqueduct 
and  the  water-pipes  are  ready,  nothing  is  needed  but  a  few 
engineers  to  regulate  the  pressure  and  a  few  workmen  to  re- 
pair leaks.  It  is  true,  indeed,  that  with  the  growth  of  cities  the 
necessary  capital  augments,  until  as  in  the  case  of  New  York 
tens  of  millions  may  be  needed.  On  the  other  hand  it  must 
be  remembered  that  water  rates  can  easily  be  fixed  at  such  a 
point  that,  without  unduly  burdening  the  public,  they  will  be 
sufficient  to  defray  interest  on  the  debt  as  well  as  the  running 
expenses.  Even  here,  however,  the  experience  of  our  large 
cities  shows  how  important  is  a  good  system   of   municipal 


§  234]  Municipal  Monopolies  625 

accounting  in  order  that  the  capital  and  income  accounts  may 
be  kept  distinct,  and  in  order  that  the  public  may  understand 
what  is  the  actual  cost  of  the  enterprise. 

With  the  gas  business  the  matter  is  not  so  simple.  Here 
the  complexity  of  management  is  considerably  greater.  The 
stimulus  of  private  initiative  is  needed  to  a  far  greater  extent 
in  order  that  the  management  may  avail  itself  of  the  constant 
improvements  in  the  process,  thus  leading  to  a  reduction  of  cost. 
In  the  one  great  example  of  municipal  gas  ownership  that 
has  existed  in  America,  —  namely,  in  Philadelphia,  —  the 
results  were  satisfactory  neither  to  the  treasury  nor  to  the 
consumer.  Whatever  may  be  said  of  the  dubious  methods 
employed  by  the  private  monopoly  to  which  Philadelphia  has 
farmed  out  the  management  of  the  gas  service,  there  is  little 
doubt  that  the  consumer  as  well  as  the  city  has  profited  in  a 
noteworthy  degree. 

In  the  case  of  the  electric  light  the  arguments  in  favor  of 
municipal  ownership  are  somewhat  more  convincing,  at  all 
events  in  the  smaller  towns,  where  natural  conditions  are  favor- 
able and  where  the  outlay  is  relatively  inconspicuous.  Although 
the  complexity  of  the  enterprise  is  largely  minimized,  consider- 
able care  must  still  be  observed  in  the  financial  management. 

Finally,  with  street  railways  the  arguments  for  municipal 
operation  are  less  strong  than  in  either  the  water  or  the  elec- 
tric light  supply.  For  here,  although  the  complexity  of  man- 
agement is  by  no  means  so  great  as  in  the  ordinary  railroad,  it 
is  of  far  more  importance  than  in  the  telegraph,  the  telephone 
or  waterworks.  It  is  unlikely  that  the  municipal  authorities 
of  any  American  city  would  have  had  the  courage  to  undertake 
such  revolutions  in  the  methods  of  transportation  as  have 
been  completed  during  the  past  few  decades  in  our  chief  cities. 
Furthermore,  the  financial  problems  involved  are  intricate. 
Even  if  municipal  ownership  be  decided  upon,  however,  the 
argument  would  seem  to  be  in  favor  of  following  the  plan  of 
the  New  York  subway,  —  namely,  government  ownership  but 
40 


626       Socialism  and  Public  Ownership    [§  234 

private  management  under  conditions  fixed  by  the  municipality, 
which  should  safeguard  the  social  interests  of  the  community, 
the  needs  of  the  treasury,  and  especially  the  legitimate  de- 
mands of  the  employees.  In  this  way  the  best  features  of  each 
system  might  be  retained. 

It  is  obvious,  then,  that  in  considering  this  problem  we  must 
not  be  led  away  by  preconceived  notions  on  either  side.  The 
outcry  of  socialism  is  a  bugaboo,  for  in  these  enterprises  free 
competition  is  inapplicable.  The  only  choice  is  between  a  pub- 
lic monopoly  and  a  private  monopoly  under  social  regulation. 
The  problem  is  not  simply  the  abstract  one  of  the  general  lim- 
its of  government  activity,  but  the  very  concrete  one  as  to  how 
far  the  practical  political  conditions  in  any  locality  permit  of 
the  application  of  the  abstract  principle.  We  may  all  agree 
that  in  these  enterprises  the  public  element  is  the  predomi- 
nant one.  We  may  all  concur  in  the  belief  that  even  where  it 
seems  desirable  to  retain  for  a  time  the  management  in  pri- 
vate hands,  the  period  may  come  when  the  advantages  to  be 
derived  from  private  management  under  social  control  will  be 
outweighed  by  the  benefits  of  direct  government  operation. 
Yet  in  a  democracy  it  is  always  wise  to  make  haste  slowly  and 
to  refrain  from  taking  a  leap  in  the  dark.  It  is  more  than  likely 
that  the  future  has  in  store  a  complete  transference  of  quasi- 
public  enterprises  to  the  public  itself,  if  for  no  other  reason 
than  to  check  the  corruption  and  control  of  local  politics  by 
vast  business  enterprises.  Until  general  economic  and  politi- 
cal conditions,  however,  are  ripe  for  such  a  radical  change,  the 
probable  result  would  be  the  substitution  of  one  kind  of  cor- 
ruption for  another,  and  the  realization  of  an  abstract  principle 
at  the  cost  of  efficiency  and  progress.  That  social  control  of 
quasi-public  enterprises  will  in  the  near  future  undergo  a  marked 
development  is  beyond  all  question.  But  it  is  not  until  social 
control  has  been  tested  and  found  wanting  that  we  shall  be 
ready  for  the  further  step  of  public  management  of  the  gas 
supply  and  the  street  railways. 


§  235]  Government  Regulation  627 

235.   Government  Regulation 

If  government  ownership  is,  as  we  have  seen,  limited  to  a 
comparatively  narrow  range  of  occupations,  government  regu- 
lation of  private  enterprise  is  widespread.  There  are  two 
currents  discernible  in  the  course  of  history:  one  has  set  away, 
from  government  interference;  the  other  in  its  direction.  The 
progress  of  liberty  and  the  recognition  of  the  advantages  of 
competition  in  modern  times  have  caused  the  government  to 
abandon  many  forms  of  regulation  which  were  common  in 
ancient  and  mediaeval  civilizations,  but  the  complexity  of  modern 
capitalism  and  the  abuses  of  freedom  have  necessitated  the 
development  of  new  kinds  of  government  activity. 

The  chief  forms  of  modern  government  interference  with 
private  industry  may  be  put  under  the  four  heads  of  action  in 
behalf  of  consumers,  of  producers,  of-  investors  and  of  the  com- 
munity in  general. 

(i)  In  the  middle  ages  the  government  interposed  in  behalf 
of  the  consumers  either  to  guarantee  good  work  or  to  insure 
reasonable  price.  Both  of  these  forms  of  interference  have 
disappeared  in  general  industry  to-day,  because  custom  has 
been  replaced  by  competition.  The  producer  who  gives  short 
measure  or  turns  out  a  defective  product  or  charges  an  exor- 
bitant price  cannot  retain  the  trade  in  the  face  of  competition. 
In  modern  times,  accordingly,  we  find  that  the  chief  form  of  in- 
terference with  competitive  industry  in  behalf  of  the  consumer 
is  legislation  to  safeguard  health,  as  in  the  case  of  food  inspec- 
tion and  quarantine  regulation.  In  addition  we  have  the  cases 
where  competition  disappears,  as  in  the  actual  monopolies 
mentioned  in  the  preceding  sections  of  this  chapter  and  in  the 
so-called  trusts  to  be  discussed  in  the  following  chapter,  and 
where  social  control  becomes  requisite.  Unregulated  private 
monopoly  is  a  menace  to  the  consumer. 

(2)  On  the  other  hand,  the  interests  of  the  laborer  have 
been  so  materially  affected  by  the  advent  of  the  factory  sys- 


628       Socialism  and  Public  Ownership    [§  235 

term  that  modern  interference  on  behalf  of  the  producers  is 
well-nigh  exclusively  limited  to  them.  As  we  shall  see  in  the 
succeeding  chapters,  there  are  five  classes  of  such  interference, 
all  of  which  are  rapidly  becoming  universal:  (a)  legislation  to 
safeguard  health,  through  the  so-called  factory  laws,  applicable 
to  men,  women  and  children  alike;  (b)  legislation  to  ensure  safety 
through  employers'  liability  and  compensation  laws;  (c)  legisla- 
tion regulating  maximum  hours  of  work;  (d)  legislation  fixing 
minimum  wages;  and  finally  (e)  compulsory  insurance  against 
illness,  old  age  or  lack  of  employment. 

While  the  advisability  of  some  particular  application  of  this 
principle  in  a  given  country  is  naturally  open  to  question, 
there  is  no  longer  any  doubt,  as  we  have  learned  in  chap- 
ter xi,  that  such  forms  of  interference  are  not  necessarily 
incompatible  with  the  highest  ideal  of  liberty,  in  the  positive 
and  social  sense.  Experience  alone  can  disclose  the  line  be- 
yond which  such  legislation  may  imperil  business  enterprise 
and  thus  injure  the  prospects  of  the  laborer  himself.  To  the 
social  economist,  however,  who  remembers  that  the  objective 
is  man  in  relation  to  wealth  rather  than  wealth  in  relation  to 
man,  the  prosperity  of  a  so-called  successful  business  which 
rests  upon  a  degraded  and  miserable  labor  force  is  illusory  and 
not  really  worth  having. 

(3)  In  former  times  the  striking  example  of  interference 
by  government  in  case  of  investment  was  in  behalf  of  the 
borrower.  The  usury  laws,  designed  to  protect  the  unfortunate 
debtor,  have,  as  we  know  (§  170),  been  rendered  almost  com- 
pletely unnecessary  through  the  growth  of  competition  in  the 
loan  of  capital.  This  same  development  has,  however,  brought 
about  the  need  of  intervention  of  the  opposite  kind.  To-day 
it  is  the  lender  or  investor  in  corporate  enterprise,  and  not  the 
borrower,  who  requires  protection.  Nowadays  it  is  rare  to  find 
any  one  who  is  not  a  depositor  in  a  savings  bank,  a  policy  holder 
in  an  insurance  company,  a  stockholder  in  a  railroad  or  other 
corporation,  or  the  possessor  of  a  bank  note  or  a  bank  account. 


§  236]  Bounties  and  Subsidies  629 

So  wide  and  intricate  are  the  ramifications  of  modern  credit 
and  finance  that  investors  or  creditors  are  obliged  to  rely  more 
or  less  implicitly  on  the  representations  and  good  faith  of  the 
managers  of  these  enterprises.  Sad  experience,  however,  has 
shown  that  the  conception  of  real  trusteeship  among  those 
entrusted  with  the  funds  of  others  is  by  no  means  so  sacred 
as  it  ought  to  be;  and  government  has  been  obliged  every- 
where to  take  precautions  to  define  and  to  enforce  responsi- 
bility. Here,  again,  there  are  dangers  on  both  sides,  the  risk 
of  over-rigidity  which  may  hamper  legitimate  enterprise,  and 
the  danger  of  lax  accountability  which  may  destroy  confidence. 
That,  however,  some  solid  measure  of  regulation  is  requisite 
can  no  longer  be  successfully  disputed. 

236.   Bounties  and  Subsidies 

We  come,  finally,  to  the  case  of  government  interference  in 
behalf  of  the  general  interests  of  the  community.  This  takes 
the  form  of  protection,  which  has  already  been  discussed  in 
chapter  xxxii,  and  also  of  bounties  and  subsidies. 

The  danger  of  such  intervention  is  that  particular  interests 
may  foist  themselves  upon  the  legislator  in  the  guise  of  general 
interests.  Bounties  may  be  classified  as  (a)  military  bounties, 
(b)  forest  bounties,  (c)  agricultural  and  industrial  bounties,  and 
(d)  land  transport  and  shipping  subsidies.  The  first  two  are  not 
primarily  economic  in  character  and  may  be  passed  by.  Agri- 
cultural and  industrial  bounties  were  frequent  in  former  cen- 
turies, but  disappeared  in  the  main  with  the  downfall  of  the 
mercantile  system.  The  chief  modern  example  is  that  of  beet 
sugar  in  Europe,  and  it  is  so  instructive  as  to  merit  some  attention. 

The  continental  blockade  under  Napoleon  put  a  stop  to  the 
colonial  trade  in  cane  sugar  and  gave  an  impetus  to  the  culture 
of  beets.  After  peace  was  established  the  beet-sugar  industry 
was  strong  enough  to  claim  and  to  receive  encouragement  in 
France,  and  the  movement  spread  somewhat  later  in  other 
continental  countries.     Cane  sugar  was  shut  out,  and  as  the 


630       Socialism  and  Public  Ownership     [§236 

yield  of  beet  sugar  now  exceeded  the  domestic  demand,  it  be- 
came necessary  to  secure  a  foreign  market.  This  was  accom- 
plished by  exempting  sugar  for  export  from  the  internal  excise 
tax  imposed  for  revenue  purposes,  or  by  a  drawback.  The 
drawback  was  frequently  greater  than  the  excise  tax,  and  thus 
was  to  all  intents  a  concealed  bounty.  Other  countries  even 
granted  direct  bounties  on  export. 

The  effect  of  this  legislation  was  to  confine  the  market  of 
each  country  to  domestic  sugar,  to  raise  prices  greatly  at  home, 
to  diminish  domestic  consumption,  to  provide  a  large  surplus 
for  export,  to  lower  prices  on  the  world  market  enormously, 
and  ultimately  to  cause  a  serious  financial  loss  to  each  bounty- 
granting  country.  While  the  cane  sugar  production  of  the 
world  increased  from  1,200,000  long  tons  in  1853-1854  to 
4,300,000  tons  in  1903-1904,  that  of  beet  sugar  rose  from 
200,000  tons  in  1853-1854  to  6,700,000  tons  in  1901-1902. 
In  the  half-century  the  proportion  of  beet  sugar  rose  from 
14  to  58  per  cent  of  the  total  output  of  sugar. 

The  system  of  sugar  bounties  gave  Great  Britain  cheap 
sugar  and  made  British  jams  and  preserves  world-famous;  but 
it  ruined  the  West  Indies,  brought  about  the  Cuban  war,  and 
was  continually  more  burdensome  to  the  European  continent. 
After  several  unsuccessful  attempts  the  Brussels  convention  of 
1903,  participated  in  by  the  chief  European  countries  except 
Russia,  abolished  all  bounties  and  excessive  drawbacks  as  well 
as  all  discrimination,  beyond  a  certain  moderate  point,  in  the 
domestic  market  against  foreign  sugar.  Expenses  thereupon 
decreased  to  such  an  extent  that  many  countries  also  lowered 
their  excise  taxes.  As  a  consequence  domestic  prices  fell, 
export  prices  rose,  beet  sugar  became  more  profitable  and 
government  expenses  were  reduced. 

The  history  of  sugar  bounties  is  an  excellent  illustration  of 
the  danger  and  ultimate  inefficacy  of  agricultural  or  industrial 
bounties  on  a  large  scale.  It  is  for  this  reason  that  such  boun- 
ties are  now  extremely  rare.    In  the  United  States  the  only  recent 


§236]  Bounties  and  Subsidies  631 

examples  are  the  bounty  on  sugar,  which  was  granted  during 
the  early  nineties  for  the  four  years  that  foreign  sugar  was 
imported  duty  free,  and  the  insignificant  bounties  for  beet  sugar 
granted  by  a  few  of  the  Western  states. 

Shipping  subsidies,  on  the  other  hand,  are  still  a  topic  of 
active  discussion.  The  experience  of  the  United  States  with 
its  subsidies  to  the  Collins  and  Pacific  IMail  lines  during  the 
two  decades  from  1845  to  1867  was  so  unsatisfactory  that  the 
system  was  abandoned.  More  recently,  however,  subsidies 
not  only  in  the  shape  of  postal  subsidies  but  also  for  tonnage, 
and  in  some  cases  even  for  construction,  have  been  inaugu- 
rated by  Great  Britain,  Germany,  France,  Japan  and  other 
countries.  In  the  United  States  they  were,  until  the  Great  War, 
limited  to  postal  subsidies.  The  argument  for  shipping  sub- 
sidies is  akin  to  that  for  protection  in  general,  which  has  already 
received  attention.  The  situation  since  the  close  of  the  war 
in  1918,  with  the  prodigious  output  of  vessels  by  the  govern- 
ment, is  of  course  ver\'  different  from  that  of  the  preceding  period. 
But  before  such  subsidies  are  granted  on  any  considerable  scale 
it  must  be  shown  that  a  large  merchant  marine  is  not  likely  to 
develop  of  itself,  that  the  aid  conferred  by  government  will 
really  stimulate  the  efficient  rather  than  shelter  the  inefficient 
and  that  the  subsidies  will  not  be  confined  to  a  few  favored 
enterprises. 


CHAPTER  XXXVI 

THE   CONTROL  OF  TRUSTS 

237.  References 

W.  S.  Stevens,  rndiistrial  Combinations  and  Trusts  (1913)  and  Unfair 
Competition  (191 7);  J.  W.  Jenks,  The  Trust  Problem  (191 7);  J.  B.  Clark, 
Control  of  Trusts  (1912);  C.  R.  van  Hise,  Concentration  and  Control 
(1912);  Bruce  Wyman,  Control  of  the  Market  (1911);  W.  J.  Brown, 
The  Prevention  and  Control  of  Monopolies  (1914);  O.  W.  Knauth,  The 
Policy  of  the  U.  S.  towards  Industrial  Monopoly  (1914);  A.  S.  Dewing, 
Corporate  Promotions  and  Reorganisations  (1914);  F.  Walker,  The  Law 
concerning  Monopolistic  Combinations  in  Continental  Europe  (Polit. 
Science  Quarterly,  vol.  xx,  1905). 

238.   The  Causes  of  Trusts 

We  have  learned  in  a  previous  chapter  that  v^^hat  are  popularly 
called  trusts  are  simply  combinations  of  capital  in  huge  corpora- 
tions or  holding  companies.  We  have  also  learned  that  this 
world-wide  movement  toward  consolidation  responds  in  large 
part  to  the  increased  efficiency  and  economy  of  production. 
As  it  was  previously  intimated,  however,  it  would  be  a  mistake 
to  ascribe  the  development  of  trusts  in  the  United  States  en- 
tirely to  this  cause.  In  fact,  many  of  the  largest  combinations 
have  succeeded  through  different  methods,  which  may  be 
summed  up  under  the  term  unfair  competition. 

Unfair  competition  is  indeed  not  confined  to  trusts.  The 
opportunities,  however,  of  indulging  in  these  practices,  repro- 
bated by  the  higher  business  ethics  of  to-day,  are  multiplied  in 
the  case  of  combinations.  The  chief  forms  of  this  unfair  com- 
petition are  the  following: 

(i)  The  formation  of  bogus  independent  companies,  designed 
to  deceive  the  public. 

632 


§  238]  The  Causes  of  Trusts  633 

(2)  The  reduction  of  local  prices  for  the  time  being  and  often 
below  cost,  in  order  to  drive  the  competitor  out  of  business, 
with  a  resulting  increase  of  price  as  soon  as  the  object  has  been 
accomplished.  Midway  between  (i)  and  (2)  and  partaking 
of  the  characteristics  of  each  is 

(3)  The  utilization  of  special  devices  like  "fighting  brands" 
or  "fighting  ships." 

(4)  The  use  of  certain  articles  as  a  condition  of  the  use  of 
other  articles  that  are  needed.  This  practice,  based  on  what 
are  often  called  "tieing  clauses,"  because  the  use  of  one  is  tied 
up  with  that  of  another,  is  found  especially  in  the  case  of  expired 
patents. 

(5)  The  acquisition  of  new  devices  for  the  sake  not  of  utiliza- 
tion, but  of  withholding  them  from  rivals. 

(6)  The  employment  of  secret  agents,  spies  or  detectives. 

(7)  The  exchange  of  customers'  lists,  sometimes  called  "yes 
and  no"  lists,  with  an  agreement  to  refuse  to  sell  to  those  who 
deal  directly  with  consumers.  A  modification  of  this  is  the 
classification  of  customers  in  order  to  avoid  "scalping"  and  to 
provide  that  the  wholesale  dealers  should  sell  only  to  certain 
specified  retail  agents. 

(8)  The  production  of  defective  and  low-priced  articles,  as 
in  the  case  of  the  "knockers,"  so  called  because  designed  to 
knock  out  competing  articles. 

(9)  Factors'  agreements,  and  similar  exclusive  arrangements, 
whereby  supplies  are  withheld  from  dealers  who  accept  rival 
commodities. 

An  added  advantage  has  in  the  past  often  been  secured  through 
railway  rebates.  These,  however,  are  now  much  less  frequent 
than  formerly.  The  influence  of  the  tariff  must  also  not  be  over- 
looked. Mr.  Havemeyer  of  the  Sugar  Trust  went  so  far  as 
to  state  that  "the  tariff  is  the  mother  of  trusts."  In  that  bald 
form,  of  course,  the  statement  involves  an  exaggeration,  for  not 
only  are  there  trusts  which  derive  no  benefit  from  the  tariff, 
but  we  find  similar  combinations  in  European  countries  where 


634  "^^^  Control  of  Trusts  [§  239 

protective  duties  are  lower  or  even  non-existent.  There  is, 
however,  little  doubt  that  an  exaggerated  duty,  by  enabling  an 
industrial  combination  to  maintain  its  prices  at  a  relatively  high 
level,  may  augment  the  advantages  enjoyed  by  a  trust  already 
In  possession  of  the  field,  even  though  the  benefit  of  these  in- 
creased prices  would  ordinarily  accrue  also  to  the  independent 
competitors. 

The  causes  of  trusts,  therefore,  may  be  declared  to  be  various. 
Their  object  is  to  secure  larger  profits,  and  to  the  producer  it 
is  immaterial  whether  these  profits  are  attained  by  efficiency 
and  economy,  or  by  unfair  competition.  That  both  causes  have 
influenced  the  development  of  trusts  is  reasonably  certain. 
From  the  point  of  view  of  the  general  welfare,  the  greatest  bene- 
fits will  obviously  accrue  by  eliminating  as  far  as  possible  the 
latter  and  giving  the  freest  possible  scope  to  the  former. 

239.   The  Effects  of  Trusts 

The  effects  of  combination  may  be  regarded  from  the  five- 
fold standpoint  of  the  owner,  the  wage-earner,  the  independent 
producer,  the  purveyor  of  the  raw  material  and  the  consumer. 

(i)  The  owner  in  modern  times  is  the  corporate  investor. 
So  far  as  the  problem  is  one  of  general  corporate  profits  depend- 
ing on  the  ordinary  mutations  of  business,  or  affected  by  the 
capitalization  of  the  enterprise,  it  has  already  been  touched 
upon  in  a  preceding  chapter.  The  surest  protection  of  the  in- 
nocent investor  is  to  be  sought,  as  we  have  seen,  through  the 
avenue  of  publicity  and  of  the  responsibility  imposed  upon 
corporate  trustees. 

(2)  The  influence  of  industrial  combination  upon  the  wage- 
earner  is  to  accentuate  the  general  effect  of  capital  upon  wages. 
This  has  already  been  studied.  So  far  as  the  prosperity  of  the 
laborers  is  bound  up  with  the  productivity  of  the  enterprise,  the 
industrial  combination  which  tends  toward  greater  stability  and 
enlarged  productivity  may  work  toward  an  improvement  in 
their  condition.     To   this   may   be   opposed   the   consideration 


§  239]  The  Effects  of  Trusts  635 

that  the  mere  fact  of  concentration  may  enable  the  enterprise 
to  present  a  more  solid  and  effectual  front  to  the  demands  of 
the  trades-unions.  Thus  the  earlier  indifference  of  the  Amer- 
ican Federation  of  Labor  to  the  Steel  Trust  or  the  American 
Tobacco  Company  soon  changed  into  open  antagonism.  On 
the  other  hand,  the  dangers  of  a  strike  are  multiplied  when  it 
extends  through  all  the  ramifications  of  a  vast  trust.  Finally, 
the  far-sighted  heads  of  a  great  combination  are  apt  to  take  a 
broader  view  of  the  labor  problem,  and  to  seek  industrial  peace 
by  wise  concessions  and  a  policy  of  making  the  worker  realize 
that  his  interests  are  in  a  large  sense  bound  up  with  those  of 
the  combination.  Yet  when  the  combination  becomes  a  monop- 
oly, there  is,  as  we  have  seen  (§  177),  a  real  and  insidious  lurking 
danger  in  its  ultimate  effects  upon  wages. 

(3)  The  independent  producer  is  undoubtedly  assailed  by 
the  combination.  We  must,  however,  distinguish  between  the 
legitimate  and  illegitimate,  the  natural  and  unnatural  effects  of 
combination.  Where  the  combination  wins  its  way  by  better 
service  to  the  public,  the  disappearance  of  the  inefficient  small 
competitor  may  be  as  advantageous  to  the  community  as  was 
the  substitution  of  the  factory  for  the  sweat-shop  or  the  railway 
for  the  coach.  Even  for  the  individual  himself,  as  long  as  he 
is  not  pre-eminently  capable,  it  may  often  be  better  to  be  an 
official  of  a  huge  enterprise  on  a  fairly  secure  salary  and  with 
prospect  of  advance  than  an  independent  producer  continually 
on  the  fringe  of  defeat,  in  much  the  same  way  as  the  "inde- 
pendent" hand-loom  weavers  in  England  and  America  were 
glad  to  join  the  ranks  of  the  factory  operatives.  To  rid  the 
community  of  the  inefficient  producer  and  to  convert  him  into 
a  useful  agent  may  be  the  beneficial  result  of  combination. 

This,  however,  presupposes  that  the  way  is  kept  open  for 
the  efficient.  In  other  words,  a  combination  must  not  be  per- 
mitted to  become  a  monopoly  except  in  those  quasi-public 
enterprises  where  competition  is  itself  undesirable.  It  is  here 
that  the  greatest  difficulty  arises.     The  dangers  of  cut-throat 


636  The  Control  of  Trusts  [§  239 

competition  are  undeniable;  but  in  the  main,  fair  competition 
between  honest  rivals  eliminates  the  inefBcient  and  perpetuates 
the  capable.  Competition,  indeed,  need  not  be  actual;  potential 
competition  may  serve  equally  well  as  a  check  to  the  dangers 
of  monopoly.  Nor  does  the  persistence  of  competition  neces- 
sarily mean  the  continuance  of  the  small  producer;  the  competi- 
tion may  be  one  between  large  units.  The  objective  is  the 
ehmination  not  necessarily  of  the  combination  but  of  the  monop- 
oly. If  the  trust  is  not  allowed  to  become  a  monopoly,  it  may 
still  be  subjected  to  actual  or  to  potential  competition. 

(4)  So  far  as  the  purveyor  of  raw  material  is  concerned, 
much  is  supposed  to  depend  upon  the  precentage  of  the  output 
taken  by  the  combination.  Where  the  business  is  only  one 
degree  removed  from  the  raw  material  of  nature,  and  especially 
where  the  supply  of  this  material  is  restricted,  the  tendency 
to  concentrate  the  ownership  of  the  raw  material  becomes 
very  strong.  It  is  significant  that  most  of  the  largest  combina- 
tions on  the  list  in  page  348  have  grown  out  of  an  ownership 
of  raw  material  which  is  not  annually  reproducible,  like  iron 
ore,  copper  and  lead.  In  several  cases,  however,  like  oil,  to- 
bacco, sugar  and  beef,  the  combination  does  not  own  the  raw 
material,  because  it  is  the  result  of  annual  production  at  once 
too  minute  and  too  widespread  for  concentration.  In  these 
and  similar  cases  the  complaint  is  often  heard  that  the  trust 
keeps  down  the  price  of  the  raw  material  by  reducing  its  offer 
to  the  lowest  limit.  While  there  undoubtedly  is  some  founda- 
tion for  this  charge,  as  especially  in  the  recent  history  of  the 
Beef  Trust  and  of  the  Standard  Oil  Trust  in  Kansas,  it  is  proba- 
ble that  the  statements  are  frequently  exaggerated.  For  in 
some  cases,  as  in  tobacco  and  sugar,  the  market  is  an  inter- 
national one,  and  even  if  the  combination  forms  so  large  a  part 
of  the  international  demand  as  to  control  the  price,  the  restric- 
tion of  the  offer  below  the  cost  of  the  marginal  producer  would 
have  the  effect  of  reducing  the  supply  and  thus  ultimately  lead- 
ing to  an  increased  price.     As  long  as  the  total  demand  for  the 


§  239]  The  Effects  of  Trusts  637 

raw  material  suffers  no  appreciable  change,  it  is  questionable 
whether  the  concentration  of  demand  into  a  few  hands  is  apt  to 
have  a  permanent  effect  on  the  producer  of  the  raw  material. 
Nevertheless  the  temporary  consequences  may  be  burdensome 
and  injurious. 

(5)  Finally,  the  combination  influences  the  consumer,  either 
favorably  or  unfavorably.  A  favorable  effect  is  the  tendency  to 
steady  prices.  Unrestricted  competition  is  always  attended 
with  sudden  and  extreme  oscillations  of  prices  according  to 
market  conditions,  as  influenced  by  the  hopes  and  fears  of  com- 
petitors. A  large  combination  is  often  in  a  better  position  to 
refrain  from  either  cutting  or  inflating  prices.  After  the  forma- 
tion of  the  railway  pools  a  generation  ago  the  range  of  variation 
in  the  New  York-Chicago  rates  was  materially  reduced.  So 
also  the  United  States  Steel  Corporation  has  exerted  a  markedly 
steadying  influence  on  prices  since  its  formation.  The  larger 
the  combination,  the  greater  the  possibility  of  this  influence. 

The  other  side  of  the  problem  is  not  so  favorable.  The 
advantage  of  combination  may  be  lower  cost,  but  the  object  of 
combination  is  higher  profits. 

It  does  not  necessarily  follow  that  higher  profits  mean,  as 
is  usually  supposed,  actually  higher  prices.  If  the  demand 
can  be  stimulated  by  a  reduction  of  prices,  higher  profits  are 
compatible  with  greater  sales  at  lower  prices.  There  is  in 
every  industry,  competitive  or  monopolistic,  an  obvious  limit 
to  high  price,  caused  by  the  possible  substitution  of  some 
lower-priced  equivalent.  This  commodity  competition  is 
omnipresent.  The  real  problem,  however,  is  whether  in  those 
combinations  which  produce  so  large  a  share  of  the  output  as 
effectually  to  control  the  market,  the  "trust"  price  is  higher 
than  would  be  the  competitive  price.  A  careful  investigation 
into  some  of  the  leading  combinations  by  the  Industrial  Com- 
mission disclosed  the  fact  that  during  selected  periods  when 
the  combinations  were  actually  in  control,  the  "differential" 
or  margin  between  the  price  of  the  raw  material  and  of  the 


638  The  Control  of  Trusts  [§240 

finished  product  had  risen,  even  though  the  actual  selling  price 
might  have  declined. 

The  conclusion  therefore  seems  to  be  that  we  must  distinguish 
between  the  effects  of  combination  and  those  of  monopoly. 
In  so  far  as  the  trust  can  be  shorn  of  monopolistic  features  it 
will  disclose  all  the  advantages  of  combination.  In  so  far  as  the 
trend  is  toward  monopoly,  the  evils  of  the  situation  will  pre- 
ponderate. Up  to  the  present  time  we  have  had  both  the  ad- 
vantages and  the  evils. 

There  remains,  however,  one  further  consideration.  Is  the 
mere  fact  of  bigness  itself  to  be  deprecated?  It  is  sometimes 
stated  that  the  industrial  ideal  is  competition  between  small 
units,  and  that  the  mere  size  of  large  combinations  is  a  menace, 
both  because  the  limits  of  efficiency  may  have  been  overstepped 
and  because  the  massing  of  immense  capital  in  a  single  hand 
is  in  itself  dangerous.  It  would  seem,  however,  that  these 
statements  are  exaggerated.  The  point  at  which  the  increased 
efficiency  disappears  is  generally  one  which  would  render 
possible  the  existence  of  very  large  combinations;  and  the 
possible  menace  from  great  aggregations  of  capital  tends  to  be 
removed  by  the  assumption  of  the  corporate  form,  whereby 
individual  ownership  in  the  enterprise  may  be  widely  distrib- 
uted. The  modern  age,  with  its  international  business  scope 
has  become  one  of  large  ventures;  and  it  is  hopeless  to  expect 
the  wheel  of  progress  to  reverse  itself.  Combination  of  capital 
is  inevitable;    monopoly  may  be  averted. 

240.   The  Prohibition  of  Trusts 

The  first  attempt  of  the  American  government  to  deal  with 
trusts  was  to  prohibit  them.  From  the  end  of  the  eighties  of 
the  last  century  most  of  the  states  vied  with  each  other  in 
stringent  prohibitions;  but  the  laws  were  without  exception 
futile.  National  legislation,  on  the  other  hand,  took  the  form 
of  the  Sherman  Act  of  1890.     This  provided  that: 

"Every  contract,  combination  in  the  form  of  trust  or  other- 


§  24o]  The  Prohibition  of  Trusts  639 

wise,  or  conspiracy  in  restraint  of  trade  or  commerce  among 
the  several  states  or  with  foreign  nations  is  hereby  declared  to 
be  Ulegal.  .  .  .  Every  person  who  shall  monopolize  or  attempt 
to  monopolize  or  combine  or  conspire  with  any  other  person 
or  persons  to  monopolize  any  part  of  the  trade  or  commerce 
among  the  several  states  or  with  foreign  nations  shall  be 
deemed  guilty  of  a  misdemeanor." 

In  the  Knight  case,  decided  in  1895,  the  American  Sugar 
Refining  Company  was  held  to  be  not  subject  to  the  law.  Two 
years  later,  however,  it  was  decided  in  the  Trans-Missouri 
Freight  Association  case  —  a  decision  reinforced  in  the  Joint 
Traffic  Association  case  in  1898,  that  combinations  are  illegal, 
even  if  reasonable  in  themselves.  In  1899  the  Addyston  Pipe 
and  Steel  Company  case  was  distinguished  from  the  Knight 
case  and  the  pooling  agreement  was  declared  to  be  illegal. 
Finally,  in  the  Northern  Securities  Company  case  in  1904,  it 
was  held  that  the  Sherman  Act  embraced  all  direct  restraints 
of  any  kind,  and  that  the  projected  combination  of  two  com- 
peting railroads  was  illegal. 

A  determined  effort  was  now  made  to  apply  the  Sherman  Act 
to  industry  in  general.  When  the  suits  instituted  against  the 
Standard  Oil  and  the  Tobacco  trusts  were  finally  decided,  in 
191 1,  the  Supreme  Court  showed  that  it  had  made  considerable 
progress  in  its  appreciation  of  the  economic  principles  involved. 
The  Standard  Oil  case  virtually  held  that  the  Sherman  Act  was 
meant  to  prohibit  only  unreasonable  or  undue  restraints  of 
trade.  The  Tobacco  case  held  further  that  the  test  of  illegality 
is  whether  the  transaction  in  question  represents  a  purpose  to 
monopolize.  The  mere  fact  that  direct  competition  comes  to 
an  end  does  not  necessarily  carry  with  it  the  purpose  to  acquire 
monopolistic  control. 

Both  cases  decided  that  the  test  of  legality  is  whether  the 
combination  lessens  competition  in  such  a  way  as  may  reason- 
ably be  thought  to  injure  either  the  consumer  or  the  competitor. 
The  test,  in  other  words,  is  the  character  of  the  resulting  injury. 


640  The  Control  of  Trusts  [§  241 

The  earlier  cases  had  decided  that  any  direct  restraint  of  com- 
petition is  illegal,  irrespective  of  the  effects  on  the  outsiders. 
Under  the  new  interpretation  of  the  law,  enterprises  may  increase 
their  business  to  any  extent,  provided  that  they  do  so  by  proper 
methods  and  do  not  interfere  with  the  rights  of  others  to  compete. 
What  is  now  prohibited,  in  other  words,  is  unfair  competition, 
for  this  alone  seems  to  disclose  a  purpose  to  acquire  monopoly 
control. 

As  a  matter  of  fact,  both  the  Standard  Oil  and  the  Tobacco 
companies  were  declared  obnoxious  to  the  law  for  this  very 
reason.  Serious  doubts,  however,  may  be  expressed  as  to 
whether  the  dissolution  of  the  combinations  has  really  availed 
to  reintroduce  the  active  competition  which  it  was  the  object  of 
the  law  to  maintain.  Thus  there  has  slowly  grown  up  the 
conviction  that  what  is  needed  is  not  so  much  the  prohibition, 
as  the  regulation,  of  trusts. 

241.   The  Regulation  of  Trusts 

The  idea  of  the  regulation  of  trusts  rests  upon  the  principle 
that  we  must  endeavor  to  preserve  the  good  while  eliminating 
the  evil  in  modern  combinations.  It  involves  the  creation  of 
an  administrative  body  of  suthciently  broad  character  to  exercise 
an  efficient  national  supervision.  What  this  should  ultimately 
be  is  still  undecided.  There  are  at  least  four  duties  which  may 
be  delegated  to  such  a  body. 

(i)  The  securing  of  publicity  —  not  that  publicity  which 
would  disclose  trade  secrets  and  put  an  enterprise  at  the  mercy 
of  its  competitors  —  but  the  financial  publicity  to  which  stock- 
holders are  entitled,  as  well  as  the  reasonable  publicity  in  the 
management  which  is  of  importance  to  the  public.  The  purpose 
of  publicity  is  to  permit  a  judgment  as  to  profits  as  well  as  to 
the  conditions  under  which  the  enterprise  is  conducted.  With 
such  publicity  potential  can  more  readily  be  converted  into  actual 
competition. 

(2)  The  prohibition  of  unfair  competition.     Railway  rebates 


§  24i]  The  Regulation  of  Trusts  641 

are  now  gradually  being  eliminated  by  the  Interstate  Commerce 
Commission.  The  restriction  of  the  other  practices  described 
above  (§  238)  is  more  difficult.  But  the  mere  existence  of  a 
commission  invested  with  the  duty  of  examining  complaints 
will  go  far  to  remedy  the  situation.  Whether  the  unfair  practices 
should  be  specified  in  the  law  is  questionable.  Inasmuch  as 
it  is  not  easy,  however,  to  frame  a  measure  at  once  compre- 
hensive and  exact,  it  seems  preferable  to  allow  a  large  degree 
of  discretion  to  the  commission. 

(3)  Helping  the  courts  to  watch  over  the  dissolution  of  such 
trusts  as  have  actually  become  monopolies,  when  the  monopo- 
listic practices  are  not  discontinued.  The  courts  have  neither 
the  time  nor  the  technical  knowledge  needed  to  execute  their 
own  decrees. 

(4)  Whether  the  commission  should  have  the  power  to  fix 
prices  is  doubtful.  The  difficulties  of  such  a  scheme  are  great. 
In  the  case  of  the  single  industry  of  the  railways,  almost  the 
entire  time  of  the  Commission  is  occupied  with  deliberations  as 
to  particular  charges.  Yet  the  problem  of  fixing  railway  rates 
is  simple  compared  with  that  of  fixing  prices  in  general.  For 
in  the  great  mass  of  commodities  we  have  the  continual  changes 
in  market  conditions,  due  to  alterations  not  only  in  the  demand, 
but  in  supply.  In  the  case  of  railways,  fluctuations  in  supply 
are  almost  wholly  absent.  A  rate  once  fixed  may  consequently 
be  presumed  to  remain  reasonable  for  a  short  time  at  least; 
whereas  in  ordinary  commodities  what  is  reasonable  to-day 
may  be  unreasonable  to-morrow.  An  adequate  supervision 
of  trust  prices  would  therefore  call  for  a  detailed  business  knowl- 
edge of  all  the  changing  conditions  of  each  trade  by  experts. 
We  should  need  not  one  commission,  but  a  separate  commission 
for  each  line  of  business. 

Moreover,  while  it  is  to  be  expected  that  any  comprehensive 
attempt  to  fix  prices  would  probably  be  unsuccessful,  it  would 
in  all  likelihood   be   rendered   unnecessary  by  the   adoption   of 
the  provisions  mentioned  above. 
41 


642  The  Control  of  Trusts  [§  241 

The  final  question  is  as  to  the  character  of  the  business  to  be 
subjected  to  regulation.  Manifestly  not  all  combinations  are 
trusts.  Inasmuch  as  the  dangers  arise  chiefly  in  large  combina- 
tions, only  those  of  a  certain  size  should  be  subject  to  regulation, 
and  that  too  only  when  they  control  a  certain  proportion  of  the 
entire  business.  The  exact  figure  must  indeed  be  arbitrary. 
If  the  important  fact  in  restraint  of  trade  is  the  influence  exerted 
upon  prices,  it  may  be  that  a  concern  with  a  50%  control  of  the 
trade  may  exert  more  influence  than  another  concern  in  a  differ- 
ent industry  with  90%  of  the  trade.  Since  the  control  of  the 
market  does  not  stand  in  any  exact  relation  to  the  proportionate 
amount  of  business,  all  that  can  be  said  is  that  if  a  combination 
controls  from  40%  to  50%  of  the  entire  business  it  becomes  at 
least  a  legitimate  object  of  suspicion. 

We  see,  then,  that  the  real  solution  of  the  trust  problem  is 
regulation  rather  than  prohibition.  In  Europe  the  governments 
have  long  since  recognized  the  futility  of  prohibition  and  are 
now  concerned  chiefly  with  attempts  at  moderate  control. 
The  United  States  is  just  entering  upon  that  field.  For  this  is 
virtually  the  meaning  of  the  so-called  anti-trust  laws  of  1914, 
creating  a  federal  trade  commission.  If  we  are  able  to  maintain 
conditions  of  equality  in  transportation,  if  we  are  able  to  secure 
a  reasonable  publicity  in  the  formation  and  the  conduct  of  the 
enterprise,  and  if  finally  we  are  ab^e  to  eliminate  unfair  compe- 
tition, the  community  may  expect  in  the  large  mass  of  private 
industry  to  reap  the  benefits  of  combination  without'  suffering 
the  burdens  of  monopoly.  The  pratical  policy  of  the  future 
must  rest  upon  a  detailed  analysis  of  large  business  enterprises 
in  the  hope  of  ascertaining  where  combination  is  possible  without 
monopoly  and  where,  on  the  other  hand,  monopoly  itself  must 
be  frankly  recognized  and  held  in  check. 


CHAPTER   XXXVH 
LABOR  LEGISLATION 

242.   References 

In  General:  Beatrice  Webb,  ed.,  The  Case  for  the  Factory  Acts  (1901); 
S.  &  B.  Webb,  Problems  of  Modern  Industry  (1898)  and  The  Prevention 
of  Destitution  (191 1);  Hutchins  and  Harrison,  History  of  Factory  Legis- 
lation (1911);  G.  G.  Groat,  Attitude  of  American  Courts  in  Labor  Cases 
(191 1);  Commons  and  Andrews,  Principles  of  Labor  Legislation  (1916); 
Preliminary  Report  of  the  New  York  Factory  Investigating  Commission, 
(3  vols.  191 2). 

Child  Labor:  O.  J.  Dunlop,  English  Apprenticeship  and  Child  Labour 
(191 2);  F.  Keeling,  Child  Labour  in  the  United  Kingdom  (1914);  George 
B.  Mangold,  Child  Problems  (1910);   Child  Labor  Bulletin. 

Women's  Labor:  Josephine  Goldmark,  Fatigue  and  Efficiency  (191 2); 
L.  D.  Brandeis  and  J.  Goldmark,  Summary  of  "Facts  of  Knoidedge" 
submitted  on  Behalf  of  the  People  in  support  of  its  Brief  on  the  Law,  in 
People  vs.  Schweinlcr  (1914);  B.  L.  Hutchins,  Women  in  Modern  In- 
dustry (1915);  E.  J.  Hutchinson,  Wotnen's  Wages  (1919). 

INDUSTRLA.L  Hygiene:  W.  G.  Thompson,  Occupational  Diseases 
(1914);  Studies  in  Vocational  Diseases  by  U.  S.  Public  Health  Service 
(1916);    P.  S.  Florence,  Factory  Statistics  and  Industrial  Fatigue  (1918). 

Hours  of  Labor:  J.  Rae,  Eight  Hours  for  Work  (1894);  Report  of 
the  U.  S.  Commission  on  Hours  of  Labor  and  Conditions  of  Employment 
in  the  Iron  and  Steel  Industry  in  the  U.  S.  (191 2);  Frankfurter  and  Gold- 
mark,  The  Case  for  the  Shorter  Working  Day  (191 6). 

Minimum  Wage:  The  Theory  of  the  Minitnum  Wage  (American 
Economic  Ass'n,  1913);  Irene  O.  Andrews,  Minimum  Wage  Legislation 
(1914);  R.  H.  Tawney,  Studies  in  the  Minimum  Wage  (1914-1916); 
L.  D.  Brandeis  and  J.  Goldmark,  Appendix  to  Briefs  fled  in  the  Case  of 
Sleiller  vs.  O'llara  (Ore.)  (1914);  M.  B.  Hammond,  Judicial  Interpreta- 
tion of  the  Minimum  Wage  in  Australia  (American  Economic  Review, 
vol.  iii,  1913);  E.  F.  McSweeney,  The  Case  Against  the  Minimum  Wage 
(1912);   P.  S.  Collier,  Minimum  Wage  Legislation  in  Australia  (1915). 

243.   The  Employment  of  Children  and  Women 

Legislation  in  behalf  of  the  laborer  has  assumed  three  principal 
forms,  dealing  respectively  with  the  conditions  of  employment, 
the  conditions  of  remuneration,  and  the  results  of  employment. 

643 


644  Labor  Legislation  [§  243 

The  chief  abuses  m  the  conditions  of  employment  first  dis- 
closed themselves  in  the  factories.  The  enactments  designed 
to  deal  with  these  abuses  were  hence  called  factory  laws.  It 
was  not  long,  however,  before  the  provisions  of  the  laws  were 
extended  to  other  occupations  than  those  conducted  in  technical 
factories.     But  the  name  persisted. 

The  earliest  form  of  factory  legislation  was  the  prohibition  of 
child  labor.  Children  of  tender  age  must  be  protected  not 
only  against  the  unprincipled  employer  but  against  the  greedy 
or  necessitous  parent.  The  argument  is  biological  and  social  as 
well  as  economic.  To  permit  child  labor  is  to  stunt  body  and 
mind,  to  breed  ignorance  and  immorality,  to  foster  a  progressive 
deterioration  of  the  working  population.  The  claim  that  the 
earnings  of  the  children  are  needed  for  the  family  support  is 
dispelled  by  the  well  authenticated  fact  that  when  the  father  is 
the  sole  wage  earner  his  income  tends  to  equal  the  previous 
earnings  of  the  entire  family. 

England  as  the  original  home  of  the  factory  system  led  the 
way  in  factory  legislation.  The  conditions  before  the  law  of 
1802  were  distressing.  The  factories  were  filled  with  pauper 
children  of  the  tenderest  age  lodged  in  rough  and  dirty  barracks, 
driven  by  hard  task-masters,  sometimes  for  fourteen  hours  a 
day,  under  conditions  that  beggar  description,  and  receiving 
food  of  the  most  disgraceful  character.  The  law  of  1802  applied 
only  to  pauper  children,  received  as  apprentices  in  cotton  and 
woollen  mills.  In  1819  the  law  was  applied  to  all  young  children 
in  cotton  mills.  In  1825  and  1831  the  age  limit  was  raised; 
and  in  1833  the  law  was  extended  to  other  textile  industries. 
Thus  from  decade  to  decade,  the  age  limit  was  increased  and 
the  scope  of  the  law  extended  until  at  present  in  England,  as 
well  as  in  many  other  European  countries,  the  child  may  be 
said  to  be,  in  large  measure,  emancipated  from  industry. 

In  the  United  States  the  movement  began  much  later,  and 
although  the  abuses  were  never  quite  so  glaring  as  Europe,  they 
were,  and  still  are,  sufficiently  great  to  demand  attention.     In 


§  243]  Children  and  Women  645 

New  York,  child  labor  is  now  regulated  by  the  compulsory- 
school  law  which  prohibits  employment  of  children  under  14 
during  the  school  term;  by  the  factory  law,  which  forbids  child 
work  under  14,  limits  it  to  eight  hours  a  day  between  the  ages 
of  14  and  16,  and  protects  children  from  overtime;  by  the 
mercantile  law  which  extends  substantially  the  same  provisions 
to  all  commercial  employments;  and  by  the  street  trades  law 
which  applies  to  newspaper  vendors.  In  the  country  at  large, 
during  the  past  few  years,  great  progress  has  taken  place  along 
the  following  lines:  (i)  The  14-year  age  limit  below  which 
children  are  not  to  be  employed,  has  been  extended  to  continually 
new  occupations;  (2)  work  during  school  term  or  school  day  has 
been  prohibited;  (3)  hours  of  labor  for  minors  between  14  and 
16,  or  in  some  cases  between  14  and  18  years,  have  been  limite-d 
to  eight;  (4)  night  work  for  minors  has  been  prohibited  in 
whole  or  in  part;  (5)  compulsory  education  laws  have  been 
extended  and  better  methods  of  proving  the  age  of  children 
seeking  employment  have  been  introduced. 

The  above  program,  however,  has  by  no  means  been  accepted 
everywhere.  The  slowness  of  the  development  in  some  sections 
led  to  the  passage^  in  1916,  of  the  Federal  Child  Labor  Law 
which  prohibited  any  business  employing  children  under  six- 
teen from  engaging  in  interstate  commerce.  When  this  was  de- 
clared unconstitutional,  it  was  replaced  in  1919  by  the  law 
imposing  a  10%  tax:  on  the  employment  of  such  child  labor. 

The  second  stage  was  the  application  of  the  law  to  women's 
work.  In  the  English  coal  mines,  during  the  early  part  of  the 
nineteenth  century,  women,  used  in  the  place  of  mules  to  haul 
the  trucks  in  the  galleries,  were  compelled  to  go  naked  and  on 
all  fours,  never  coming  to  the  surface  and  often  bearing  their 
children  below  ground.  The  English  laws,  which  were  first 
applied  to  women  in  mines  and  in  textile  factories  in  1841  and 
1844  were  opposed  until  almost  the  middle  of  the  nineteenth 
century  as  an  interference  with  the  freedom  of  contract."  In 
the  United  States,  where  the  legislation  began  much  later,  the 


646  Labor  Legislation  [§  244 

same  objection  was  long  successfully  urged.  The  last  few  years, 
however,  have  seen  a  great  change.  In  1908  the  ten-hour  law 
of  Oregon  and  in  191 5  the  eight-hour  law  of  California  were  up- 
held. The  movement  for  the  protection  of  women  in  industry  is 
accordingly  now  taking  four  forms:  limitation  of  hours  of  work; 
prohibition  of  night  work;  provision  of  special  conveniences; 
and  protection  to  childbirth. 

By  1919  the  limit  of  hours  of  work  had  been  reduced  to  9 
in  twelve  states,  and  to  8  in  six  states.  In  most  of  the  older 
states  the  limit  was  still  10  hours  a  day,  or  52  to  54  a  week. 
In  only  seven  states  was  there  no  legal  regulation  of  hours  of 
work  at  all. 

In  Europe,  following  a  conference  on  the  subject  in  1906,  an 
agreement  to  prohibit  night  work  was  signed  by  fourteen  coun- 
tries. The  movement  is  now  rapidly  spreading  in  the  United 
States.  The  last  few  years  have  also  seen  improvement  in  the 
conveniences  required  for  women  workers,  such  as  seats,  ade- 
quate dressing  rooms  and  the  like.  The  latest  form  of  protec- 
tion is  that  of  the  treatment  of  women  shortly  before  or  after 
childbirth.  Italy  led  the  way  several  years  ago  with  an  en- 
forced rest  period;  and  some  countries,  like  England  and  Ger- 
many, even  provide  a  method  of  insurance  for  this  enforced 
vacation.  In  the  United  States,  Massachusetts  made  a  be- 
ginning with  a  law  of  191 1,  prohibiting  the  employment  of 
women  for  two  weeks  before,  or  four  weeks  after,  childbirth. 
New  York  followed  in  191 2  and  Connecticut  and  Vermont  in 
1 913  with  somewhat  similar  laws.  The  benefits  of  such  restric- 
tions from  both  the  medical  and  the  larger  social  point  of  view  are 
so  obvious  as  to  require  little  discussion. 

244.  The  Protection  of  Life,  Health,  and  Comfort 

The  recognition  of  the  legitimacy  of  factory  laws  applicable 
to  men  came  much  later.  The  actual  legislation  either  deals 
with  the  protection  of  life,  health,  and  comfort,  or  regulates 


§  244]  Protection  of  Health  647 

the  hours  of  labor.  Under  the  former  head  are  to  be  classed  the 
laws  regarding:  (i)  accidents;  (2)  fire;  (3)  sanitation  and 
ventilation;  (4)  occupational  disease;  (5)  especially  hazardous 
industries;   and  (6)  home  work  and  sweatshops. 

After  the  early  appalling  experience  of  the  ease  with  which 
operatives  were  maimed,  governments  intervened  to  require 
elaborate  precautions  and  safety  appliances.  Such  provisions 
are  now  common,  although  not  uniformly  enforced. 

From  the  protection  against  accident  to  that  against  fire  is 
only  a  step.  The  need  of  such  protection  in  the  United  States 
is  greater  than  abroad,  owing  to  the  more  extended  use  of 
wood  in  building  construction.  The  Triangle  fire  in  New  York 
in  igi2  led  there  and  elsewhere  to  the  adoption  of  far  more 
stringent  protective  legislation. 

The  protection  of  life  was  soon  followed  by  that  of  health. 
The  advance  of  medical  knowledge  and  the  increasing  realization 
of  the  dangers  of  unsanitary  conditions  have  led  to  the  elabora- 
tion of  the  new  discipline  of  industrial  hygiene,  the  teachings  of 
which  are  gradually  being  enforced  in  laws  that  lay  down  mini- 
mum requirements  as  to  the  character  of  light,  amount  of 
ventilation,  and  cubic  feet  of  air  necessary  for  each  employee. 

Still  further  advances  have  been  made  in  the  treatment  of 
occupational  disease.  Europe  has  long  since  been  paying 
especial  attention  to  the  "poisonous  trades";  in  the  United 
States  the  movement  has  only  just  begun.  The  first  national 
conference  on  industrial  diseases  was  held  in  19 10,  and  a  recent 
memorial  to  the  federal  government  declares  that  at  least  25% 
of  such  disease  may  be  readily  eliminated.  Occupational 
diseases  are  due  to  the  following  factors:  (i)  harmful  substances, 
such  as  metal  poisons,  toxic  fluids,  toxic  or  irritant  juices,  organic 
germs  and  miscellaneous  irritants;  (2)  harmful  conditions  of 
physical  environment,  such  as  hazards  from  air  pressure,  hu- 
midity, temperature,  or  light;  (3)  injuries  to  nerves,  muscles, 
and  bones;  (4)  injuries  to  special  organs,  like  the  skin,  eyes, 
ears,    nose,    and    throat.     In    191 1    several   states.    New   York 


648  Labor  Legislation  [§  245 

among  them,  initiated  legislation  requiring  the  annual  report- 
ing of  accidents  in  such  occupations.  In  191 2,  the  national 
government  put  an  end  to  phossy  jaw,"  by  imposing  a  prohibi- 
tive tax  on  the  manufacture  of  poisonous  phosphorus  matches. 
The  first  state  legislation  of  a  similar  character  was  that  of  1913 
in  Pennsylvania,  Ohio  and  Mississippi.  By  1916  there  were 
no  less  than  sixteen  states  which  had  enacted  legislation  de- 
signed to  protect  the  workers  against  infectious  or  occupational 
disease. 

Closely  related  to  the  poisonous  trades  are  the  peculiarly 
hazardous  occupations.  Almost  all  American  states  in  which 
there  are  coal  or  other  mines  have  enacted  special  laws  pro- 
viding for  rescue  cars,  emergency  rooms,  machine  drills,  the  regu- 
lation of  the  quality  of  illuminants  and  the  handling  of  powder. 
Even  more  widespread  are  the  laws  affecting  railway  transporta- 
tion, with  detailed  provision  for  safety  couplers,  air  brakes,  etc. 
Similar  legislation  has  also  now  become  common  in  the  building 
and  the  electric  trades,  and  in  the  construction  of  tunnels, 
caissons,  etc. 

Still  more  recent  is  the  application  of  factory  legislation  to 
home  work  or  sweatshops,  especially  in  the  so-called  parasitic 
trades.  Here,  as  in  Massachusetts  and  New  York,  a  license  is 
now  required  for  the  manufacture  of  articles  like  clothing, 
artificial  flowers  and  cigars,  in  the  home.  It  is  an  attempt  to 
make  domestic  workshops  amenable  to  factory  restrictions. 

245.  The  Regulation  of  the  Hours  of  Labor 

The  second  category  of  laws  dealing  with  general  conditions 
of  employment  affects  the  hours  of  labor.  Such  laws  either  pro- 
vide for  a  periodical  day  of  rest  or  restrict  work  on  weekdays. 

The  first  point  is  that  of  Sunday  labor.  There  are,  indeed, 
certain  occupations  which  must  be  carried  on  every  day  in  order 
to  provide  the  necessities  of  life.  The  gradual  weakening  of  the 
religious  prohibitions  and  the  increasing  complexity  of  modern 
social  conditions  have  cooperated  to  break  down  the  old  colonial 


§  245]      Regulation  of  Hours  of  Labor        649 

"blue"  laws.  But  the  obvious  need  of  intermission  from 
continuous  work  is  now  recognized  and  the  new  one-day-rest- 
in-seven  laws,  based  on  economic  rather  than  on  religious  con- 
siderations, now  provide  that  Sunday  workers  must  receive  a 
holiday  during  the  w'eek. 

The  matter  has  been  complicated  by  the  development  of  in- 
dustries where  continuous  labor  is  needed,  not  to  supply  the 
daily  wants  of  the  consumer  but  to  prevent  the  losses  which 
would  ensue  upon  a  periodical  shutting  down  of  the  machinery. 
A  recent  government  report,  for  instance,  has  pointed  out  that 
in  1 9 10  of  173,000  employes  in  the  blast  furnaces  and  steel 
mills  and  rolling  works,  50,000  or  29%  worked  seven  days  in 
the  week  and  20%  worked  84  or  more  hours  per  week,  that  is, 
at  least  12  hours  a  day,  including  Sundays,  and  that  in  Massa- 
chusetts at  least  222,000  individuals  were  engaged  in  seven  days' 
labor.  In  192 1  the  situation  was  not  much  better.  The  chief 
industries  in  which  such  labor  is  now  found  are  the  metal  and  the 
public-service  industries. 

American  legislation  on  the  subject  is  here  also  in  its  infancy. 
In  1913  New  York  and  Massachusetts  provided  that  all  em- 
ployees in  factories  and  mercantile  establishments  must  be 
given  at  least  24  hours'  consecutive  rest  in  seven  days,  although 
the  New  York  law  was  weakened  in  1914  by  granting  the  Com- 
missioner of  Labor  the  privilege  of  exempting  employees  in  neces- 
sarily continuous  industries  which  have  the  eight-hour  day. 

The  other  form  of  labor  time  legislation  restricts  the  hours 
of  daily  toil.  Here,  as  in  the  case  of  female  labor  laws,  the 
courts  at  first  clung  to  the  freedom-of-contract  theory.  In 
1898,  however,  the  Supreme  Court  upheld  the  Utah  law  estab- 
lishing the  eight-hour  day  in  mines  and  smelters;  and  about  a 
decade  later  the  federal  law  affecting  the  hours  of  labor  on  inter- 
state railways  was  declared  valid.  In  191 1  Georgia  enacted  a 
ten-hour  law  applicable  to  textile  factories.  In  191 2  Massa- 
chusetts applied  the  principle  to  conductors  and  motormen  and 
New  Jersey  to  bakeshops;   in  1913  Mississippi  and  in  1914  Ore- 


650  Labor  Legislation  [§  246 

gon    applied    the    principle    to    all    factories    and    mercantile 
establishments. 

In  the  case  of  public-service  corporations,  many  countries 
have  gone  further  by  creating  the  eight-hour  day  as  the  maxi- 
mum limit.  This  applies  not  alone  to  government  employees 
but  to  ship-building  and  army-supply  industries  which  manu- 
facture directly  for  the  government.  In  the  United  States  the 
eight-hour  day  has  long  been  enforced  in  the  national  as  well  as 
in  many  state  and  city  governments;  but  it  was  applied  for  the 
first  time  to  public-service  corporations  in  a  somewhat  modified 
form  by  the  federal  eight-hour  railroad  service  act  of  1916.  Not 
a  few  private  industries,  both  here  and  abroad,  have  voluntarily 
adopted  the  eight-hour  system  and  have  found  it  profitable. 

246.   The  Minimum  Wage 

The  second  phase  of  labor  legislation  mentioned  on  page  643, 
concerns  the  conditions  of  remuneration.  These  fall  under  four 
heads:  (i)  The  contract  of  employment;  (2)  strikes  and  boy- 
cotts;   (3)  the  truck  system;    and  (4)  the  minimum  wage. 

Of  these  the  first  is  of  relatively  minor  importance  and  the 
second  has  been  touched  on  above.  The  truck  or  company 
store  system,  however,  has  from  the  beginning  been  a  glaring 
abuse.  Large  employers  have  frequently  provided  stores  at 
which  nearly  everything  needed  by  the  workman  could  be 
purchased.  Before  long,  however,  wages  were  paid  in  scrip  or 
tickets  on  the  stores,  instead  of  in  cash;  the  quality  of  the 
goods  depreciated;  and  the  temptation  to  overcharge  was  often 
irresistible.  So  notorious  did  the  abuses  become  that  the 
stores  earned  the  name  of  "pluck  me"  stores,  and  often  proved 
to  be  an  insidious  way  of  nibbling  at  wages.  Anti-truck  laws  as 
a  consequence  were  enacted  at  an  early  period  in  England  and 
are  now  found  in  many  of  the  American  states;  but  the  abuse 
itself  has  by  no  means  entirely  disappeared. 

The  most  recent  legislation  deals  with  the  minimum  wage. 
In  the  middle  ages  the  attempt  was  to  regulate  maximum  wages 
in  the  interest  of  the  employer;   the  modern  endeavor  is  to 


§  246]  The  Minimum  Wage  651 

regulate  minimum  wages  in  the  interest  of  the  employee.  The 
need  of  such  regulation  has  made  itself  felt  in  three  classes  of 
trades:  the  so-called  parasitic  trades,  the  immigrant  trades, 
and  the  department  stores.  The  parasitic  trades  are  found 
chiefly  in  the  case  of  home  workers,  where  the  work  is  so  simple 
that  almost  anyone,  including  children,  can  be  employed.  In 
the  complete  absence  of  labor  organization,  the  conditions  are 
such  as  to  enable  sub-contractors  to  play  individual  against 
individual  and  to  beat  wages  down  to  the  starvation  or  sweat- 
shop level. 

Many  of  these  trades  are  recruited  in  the  United  States  by 
immigrants;  but  immigrants,  unaccustomed  to  the  prevalent 
standard  of  living  and  willing  to  take  only  a  little  more 
than  what  they  received  at  home,  are  found  in  many  other 
occupations.  Finally,  in  department  stores,  wages  are  often 
exceedingly  low  because  they  constitute  only  a  partial  support 
of  some  of  the  workers,  because  the  position  of  the  girls  who 
look  forward  to  marriage  is  often  regarded  as  temporary,  and 
because  there  is  always  a  relative  oversupply  of  applicants  for 
positions  requiring  little  or  no  training. 

The  result  is  that  we  find  large  sections  where  the  wages  are 
wofuUy  inadequate,  and  where  the  minimum  wage  is  not  far 
different  from  the  living  wage.  A  good  definition  is  that  given 
by  Justice  Higgins  of  the  Australian  court,  as  "the  wage 
necessary  to  satisfy  the  normal  needs  of  the  average  employee 
regarded  as  a  human  being,  living  in  a  civilized  community." 

]\Iinimum-wage  legislation  was  initiated  in  Australasia.  New 
Zealand  began  in  1894,  making  it  part  of  a  movement  to  prevent 
strikes  through  the  compulsory  arbitration  court.  Victoria 
started  a  different  method  in  i8g6,  when  it  created  a  system  of 
wages  board  through  the  compulsory  cooperation  of  the  employer 
and  the  employee,  —  a  system  followed  by  South  Australia  in 
1900,  Queensland  in  1908,  and  Tasmania  in  1910.  The  New 
Zealand  system  of  compulsory  arbitration  was  adopted  by  New 
South  Wales  in  1901,  West  Australia  in  1902,  and  the  Australian 


652  Labor  Legislation  [§  246 

Commonwealth  in  1904.  New  South  Wales,  however,  added 
the  system  of  wages  boards  in  1908,  and  New  Zealand  introduced 
conciliation  councils  in  the  same  year.  On  the  other  hand, 
Victoria  added  a  court  of  industrial  appeal  in  1903  and  South 
Australia  in  1907. 

In  England  provision  was  made  in  1909  for  the  erection  of 
trade  boards  and  district  trade  committees,  empowered  to 
prescribe  a  minimum  wage  in  four  occupations:  the  readymade 
and  wholesale-bespoke  tailoring,  paper-box  making,  machine- 
made  lace  and  net  finishing,  and  certain  kinds  of  chain  making. 
In  191 2  a  similar  system  was  introduced  into  the  coal  mines  of 
England  and  Wales  and  in  1913  four  more  occupations  were 
added.  In  the  United  States  the  first  minimum-wage  law  was 
that  of  Massachusetts  in  191 2.  This  did  not  provide  a  com- 
pulsory enforcement  of  the  award  of  the  trade  boards,  limiting 
itself  to  the  privilege,  under  certain  conditions,  of  publish- 
ing the  names  of  the  offending  employers.  The  movement 
now  spread  rapidly,  especially  after  the  Oregon  law  had  been 
upheld,  and  by  1919  fifteen  states  had  adopted  minimum- wage 
legislation  of  a  compulsory  nature.  The  administrative  autho- 
rities are  known  as  trade  boards,  state  wage  boards  or  indus- 
trial welfare  commissions  and  in  a  few  cases,  the  act  itself 
fixes  a  classified  minimum-wage  scale.  American  legislation, 
however,  in  contradistinction  to  that  of  England  and  Aus- 
tralasia, applies  thus  far  only  to  women  and  children,  although 
in  some  cases  the  law  includes  minors  up  to  21.  There  is 
every  prospect  that  the  next  few  years  will  see  a  great  extension 
of  the  system. 

The  arguments  for  a  minimum  wage  are  not  materially  differ- 
ent from  those  in  behalf  of  the  other  forms  of  labor  legislation. 
If  it  is  legitimate  to  defend  a  minimum  standard  in  respect  to 
protection  against  accidents,  and  to  the  hours  of  labor,  it  is 
difficult  to  see  why  the  arguments  do  not  apply  to  the  remunera- 
tion for  labor;  for  to  work  for  wages  below  a  necessary  minimum 
is  at  least  equally  hazardous  to  health  and  to  efficiency.     The 


§246]  The  Miniinum  Wage  653 

arguments  advanced  against  the  minimum  wage  are  the  follow 
ing:  (i)  the  industry  cannot  afford  to  pay  the  increased  wage. 
The  answer  is:  first,  that,  as  experience  has  shown,  an  increase 
of  wage,  especially  in  the  parasitic  trades,  often  leads  to  an 
increase  of  efficiency;  and  secondly,  that  if  the  industry  is  not 
able  to  pay  living  wages,  it  is  better  to  replace  it  by  one  in  which 
the  natural  advantages  will  render  this  possible.  (2)  The 
danger  is  that  all  wages  will  be  leveled  down  to  the  minimum, 
so  that  the  minimum  will  tend  to  become  the  average  wage. 
This  is  the  same  argument  formerly  advanced  against  the  trade 
unions  (§  180);  but  it  is  borne  out  by  neither  theory  nor  experi- 
ence. (3)  The  implication  is  that  the  government  must  provide 
work  at  the  given  wage  as  well  as  wages  for  a  given  work.  The 
answer  here  is  that  there  is  no  more  implied  obligation  on  the 
government  to  provide  work  when  it  fixes  a  minimum  wage  than 
when  it  restricts  the  hours  of  labor  or  enacts  laws  affecting 
industrial  hygiene.  The  law  simply  states  that  if  the  employer 
carries  on  the  industry  he  shall  do  so  under  certain  conditions. 
(4)  The  law  is  difficult  of  enforcement.  This  may  readily  be 
granted  without,  however,  impugning  the  necessity  of  the  law. 
The  correct  conclusion  to  be  drawn  is  the  need  of  adopting  the 
best  administrative  methods.  (5)  The  danger  of  interstate 
competition  will  render  all  such  state  laws  nugatory.  This 
objection  may  also  be  conceded  in  part;  but  to  the  extent  that 
it  holds  good  it  follows  that  we  shall  ultimately  have  to  come  to 
federal  regulation.  (6)  A  compulsory  minimum  will  mean  a 
virtual  gratuity  to  the  unemployable.  This,  however,  is  really 
an  advantage;  for  if  the  law  will  lead  to  a  sifting  out  of  those 
who  do  not  want  or  are  not  able  to  work,  the  public  will  be  in 
a  better  position  to  deal  with  the  problem  of  unemployment. 

The  short  experience  with  the  minimum  wage  tends  to  show 
the  following  advantages  of  the  system:  (i)  A  distinction  is 
made  between  the  unemployed  and  unemployable;  (2)  the 
field  of  competition  between  the  workers  is  restricted  and  the 
fluctuations  not  only  in  earnings  but  in  production  are  some- 


654  Labor  Legislation  [§  246 

what  checked;  (3)  an  impetus  is  given  to  the  formation  of  labor 
unions  among  the  hitherto  unorganized  and  weaker  laborers; 
(4)  the  increased  wages  have  been  met  partly  by  an  increase  in 
the  quantity  or  quality  of  the  output,  partly  by  a  reduction  in 
profits,  and  partly  by  an  advance  in  price.  There  is  every 
reason  to  believe,  therefore,  that  the  movement  initiated  in 
Australasia  and  subsequently  adopted  in  Great  Britain  will 
spread  rapidly  in  the  United  States  and  on  the  European 
continent. 


CHAPTER   XXXVIII 
SOCIAL  INSURANCE 

247.   References 

In  General:  I.  M.  Rubinow,  Social  Insurance  (1913);  H.  R.  Seager, 
Social  Insurance  (1910);  Frankel  &  Dawson,  Workingmen's  Insurance 
in  Europe  (1911);  S.  &  B.  Webb,  The  Prevention  of  Destitution  (1911); 
Workingmen's  Insurance  in  Europe,  U.  S.  Bureau  of  Labor,  2  vols. 
(1911);   W.  H.  Dawson,  Social  Insurance  in  Germany  (1912). 

Accident  Insurance:  Crystal  Eastman,  Work  Accidents  and  the 
Law  (1910);  Schwedtman  &  Emery,  Accident  Prevention  and  Relief 
(191 1);  Report  of  the  New  York  Commission  to  Inquire  into  the  Question 
of  Employers'  Liability  (1911). 

Health  Insurance:  T.  Smith,  Everybody's  Guide  to  the  National 
Insurance  Act  (191 2);  Carr,  Garnett  and  Taylor,  National  Insurance 
(1Q14);  Sir.  J.  Collie,  Malingering  and  Feigned  Sickness  (1913);  Am. 
Labor  Legislation  Ass'n,  Brief  for  Health  Insurance  (1916). 

Old  Age  Insurance:  Rogers  &  Millar,  Old  Age  Pensions  (1903); 
S.  Wellington,  Old  Age  Dependency  in  the  United  States  (1914);  M. 
Nassau,  Old  Age  Poverty  in  Greenwich  Village  (1915). 

Unemployment  Insurance:  W.  H.  Beveridge,  Unemployment  (1909); 
I.  C.  Gibbon,  Unemployment  Insurance  (191 1);  S.  &  B.  W^ebb,  Public 
Organization  and  the  Labour  Market  (1910) ;  S.  Webb,  ed.  Seasonal  Trades 
(191 2);  Rowntree,  Seebohm  &  Lasker,  Unemployment  (191 1);  A.  C. 
Pigou,  Unemployment  (1914);    A.  KeUor,  Out  of  Work  (1915). 

248.   The  Reasons  for  Social  Insurance 

Social  insurance  may  be  defined  as  the  attempt  to  remove  from 
the  working  classes  through  associated  effort  those  peculiar 
hazards  to  life,  health  and  comfort  which  are  due  to  the  modern 
industrial  system.  The  difference  between  business  and  social 
insurance  is  that  in  the  one  case  the  premiums  are  paid  by  the 
insured,  whereas  in  the  other  this  is  true  only  in  part,  if  at  all. 
For  the  object  of  social  insurance  is  to  emphasize  the  social 
causes  of  these  hazards  and  to  accentuate  the  responsibility  of 

655 


656  Social  Insurance  [§248 

society  as  a  whole.  The  term,  however,  also  includes  those 
forms  of  aid  where  the  workman  makes  no  contribution  at  all 
and  where  we  have  to  deal  with  state  pensions  rather  than  with 
premiums. 

The  problem  here  involved  is  a  result  of  modern  industry  and 
democracy.  On  the  one  hand  the  instability  of  modern  indus- 
trial life  and  the  hazards  to  which  the  wage  earner  is  exposed 
have  multiplied  enormously;  and  on  the  other  hand  the  relative 
ability  of  wage  earners  to  withstand  these  risks  has  diminished. 
That  the  condition  of  the  workman  has  improved  is  true.  This 
means,  however,  that  his  general  standard  of  life  has  risen;  it 
does  not  mean  that  there  is  an  increase  in  the  available  surplus 
above  his  necessary  living  expenses.  Yet  without  such  surplus 
there  is  little  opportunity  of  meeting  the  cost  of  these  im- 
mensely augmented  risks,  which  are  responsible  for  much  of 
modern  poverty  and  destitution.  The  inadequacy  of  individ- 
ual provision  for  these  risks  is  one  of  the  chief  reasons  for 
social  insurance. 

The  other  reason  is  the  feeling  that  every  individual  should, 
so  far  as  possible,  be  permitted  to  share  in  the  benefits  of  modern 
civilization;  and  that  he  is  often  prevented  from  doing  this  by 
something  other  than  his  own  fault.  If  there  is  such  a  con- 
ception as  social  wealth,  or  the  wealth  created  by  society  as  a 
whole,  there  is  room  also  for  the  conception  of  social  risks,  that 
is,  risks  created  by  modern  industry  and  which  tend  to  check 
the  growth  of  this  social  wealth.  The  aristocratic  ideas  in  both 
industry  and  politics  formerly  emphasized  the  need  of  the 
exceptional  man  and  underrated  the  importance  of  the  many. 
The  meaning  of  modern  democracy,  whatever  be  its  short- 
comings, is  that  insistence  be  placed  in  both  economics  and 
politics  on  the  needs  and  the  opportunities  of  the  many.  One 
of  these  needs  is  that  of  social  or  community  provision  for  the 
hazards  that  are  not  referable  to  individual  fault.  Thus  both 
democracy  and  industry  are  responsible  for  the  modern  concep- 
tion of  social  insurance. 


§  249]  Accident  Insurance  657 

The  five  chief  hazards  in  question  are  those  connected  with 
accidents,  sickness,  invalidity,  old  age  and  unemployment. 
There  are  therefore  five  chief  forms  of  social  insurance. 

249.   Accident  Insurance 

That  the  modern  factory  system  has  multiplied  industrial 
accidents  is  now  universally  recognized.  In  eleven  European 
countries  there  are  now  about  two  million  industrial  accidents  a 
year,  of  which  over  22,000  are  fatal.  In  the  United  States  in 
1908,  in  the  so-called  "registration  area,"  covering  about  one- 
half  of  the  population,  the  number  of  fatal  accidents  due  to 
"industrial  causes"  varied  from  20,000  to  36,000,  according  to 
the  interpretation  given  to  the  term.  In  the  railroad  industry 
alone  in  19 10  there  were  about  130,000  accidents  to  employees. 
In  the  country  as  a  whole  industrial  accidents  are  probably  not 
far  from  two  millions  a  year,  of  which  about  30,000  are  fatal, 
about  200,000  lead  to  permanent  disability,  and  about  170,000 
result  in  a  disability  of  at  least  three  months. 

The  first  attempt  to  grapple  with  this  evil  was  the  system  of 
employers'  liability.  The  effort  of  the  wage  earner,  however,  to 
secure  redress  was,  in  English-speaking  countries  at  least,  seri- 
ously impeded  by  the  development  during  the  nineteenth 
century  of  the  so-called  three  defences:  (i)  The  fellow-servant 
doctrine.  Why  should  the  employer,  it  was  argued,  be  held 
responsible  for  the  injury  that  was  caused  by  one  employee  to 
another?  (2)  The  assumption-of-risk  doctrine.  If  a  workman 
chooses  to  take  up  a  specific  occupation  does  he  not  voluntarily 
assume  the  risk  connected  therewith,  and  is  he  not  at  liberty 
to  abandon  the  employment?  (3)  The  doctrine  of  contributory 
negligence.  Why  should  the  employer  be  responsible  when 
the  wage  earner  himself  through  his  negligence  contributes  to 
the  accident? 

The  result  was  that  only  in  exceptional  cases  could  the  work- 
man recover  any  damages  at  all.  Most  accidents  remained 
uncompensated;  the  amount  recovered  bore  little  proportion  to 
42 


658  Social  Insurance  [§  249 

the  nature  of  the  injury  or  the  need;  and  it  was  secured,  if  at  all, 
only  after  a  long  time.  Furthermore,  a  great  part  of  the  funds 
was  wasted  in  lawyers'  fees  and  the  attempt  of  a  workman  to 
bring  suit  for  an  accident  ordinarily  led  to  his  dismissal.  Even, 
therefore,  in  cases  where  the  force  of  the  alleged  three  defences 
was  gradually  weakened  by  judicial  interpretation  or  statute, 
the  employers'-liability  system  continued  to  be  distasteful  to 
the  wage  earner;  while  on  the  other  hand,  the  increase  in  occa- 
sional large  verdicts  and  the  loss  resulting  from  the  friction  in 
industrial  disputes  gradually  caused  the  employers  to  realize 
the  inadequacy  of  the  system. 

Accordingly,  employers'  liability  has  been  replaced  by  work- 
men's compensation  or  accident  compensation.  The  funda- 
mental feature  of  this  is  the  adoption  of  the  principle  of  the 
trade  risk  or  the  professional  risk,  based  on  the  conception  of 
a  hazard  attaching  to  the  industry. 

While  under  the  compensation  system  the  burden  is  shifted 
to  the  industry  and  is  ultimately  borne  by  the  community, 
it  is  borne  in  the  first  instance  by  the  employer.  In  order  to 
distribute  over  a  group  the  risks  of  the  individual  employers, 
recourse  was  taken  to  the  principle  of  insurance. 

Accident  insurance  is  of  two  kinds:  voluntary  insurance, 
where  the  employer  is  left  at  liberty  to  insure,  as  in  England 
under  the  workman's  compensation  act  of  1897  and  in  France 
since  1898;  or  compulsory  insurance,  which  was  introduced  in 
Germany  in  1884  and  adopted  by  Austria  in  1887  and  Italy  in 
1898.  Of  the  European  countries  Vv'ith  the  compulsory  insur- 
ance system  some  permit  the  employers  to  choose  the  insurance 
institutions,  while  others  prescribe  institutions  under  more  or 
less  strict  control  of  the  government,  and  some  even  offer 
insurance  through  the  government  itself.  Which  method  is 
pursued  makes  perhaps  little  difference  as  long  as  the  chief  objects 
of  an  accident-compensation  system  are  achieved,  namely,  the 
inclusion  of  as  wide  a  range  of  industry  as  possible  (in  Great 
Britain  all  industries);    the  security  of  payment,  which  can  be 


§  249]  Accident  Insurance  659 

reached  only  through  some  form  of  governmental  guaranty  or 
supervision;  and  the  provision  of  adequate  compensation, 
which  was  originally  about  half,  and  which  is  now  gradually 
being  increased  to  three-quarters,  of  the  wage. 

In  the  United  States  the  first  law  on  the  subject,  that  of 
Maryland  in  1902,  was  declared  unconstitutional.  The  first 
federal  act  was  that  of  1908.  The  Massachusetts  law  of  1909 
providing  for  optional  insurance  remained  a  dead  letter  and  the 
Montana  law  was  declared  unconstitutional.  A  similar  fate 
befell  the  New  York  law  in  1910.  Since  191 1,  however,  the 
movement  spread  so  rapidly  that  by  1920  all  but  five  Southern 
states  had  adopted  compensation  laws,  representing  every 
phase  of  the  system  from  optional  and  voluntary  insurance  in 
private  institutions  to  an  out-and-out  government  insurance. 

The  most  advanced  law  is  the  workmen's  compensation  law 
of  New  York  of  1913-14.  Compensation,  granted  in  forty-two 
groups  of  occupations  (not  including  agricultural  or  domestic 
service)  is  due  in  every  case  except  where  the  injury  is  occasioned 
by  the  willful  act  of  the  employee  or  where  it  results  solely  from 
intoxication.  The  normal  rate  of  compensation  is  two-thirds 
of  the  average  weekly  wage,  which  continues  during  the  period 
of  disability,  with  special  provisions  for  the  loss  of  various 
members  of  the  body,  and  carefully  defined  death  benefits. 
The  payment  is  secured  by  the  employer's  obligation  to  insure  in 
the  state  insurance  fund,  in  a  private  insurance  company,  or  in 
exceptional  cases  by  self  insurance  under  strict  control  of  the 
compensation  commission. 

The  objection  is  sometimes  made  that  accident  insurance  is 
no  solution,  because  what  is  desired  is  prevention  rather  than 
compensation.  It  is  forgotten,  however,  that  compulsory  com- 
pensation is  the  surest  inducement  to  achieve  prevention.  Just 
as  fire-insurance  methods  have  led  to  improvements  in  fire 
prevention,  so  the  employers  have  banded  themselves  together 
in  occupational  or  territorial  groups,  which  have  vied  with  each 
other  in  installing  improvements  to  prevent  accidents  and  thus 


66o  Social  Insurance  [§  250 

to  keep  down  the  insurance  premiums.  Hence  accident  insur- 
ance is  thoroughly  justified  —  from  the  point  of  view  of  the 
individual  workman,  of  the  employer,  and  of  society  at  large. 
It  tends  not  only  to  diminish  accidents  but  to  eliminate  the 
risks  of  accident. 

250.  Health  Insurance 

While  the  conception  of  individual  fault  has  now  finally  dis- 
appeared in  the  case  of  accident,  the  social  aspect  of  illness  is 
only  beginning  to  be  recognized.  Yet  the  distinction  is  after 
all  one  of  degree  rather  than  of  kind.  There  are  indeed  non- 
occupational diseases,  but  so  there  are  non-occupational  accidents; 
and  as  in  the  case  of  accidents  the  overwhelming  mass  of  illness 
from  which  the  modern  wage  earner  suffers  is  due  more  or  less 
directly  to  the  conditions  of  employment  or  of  remuneration. 
The  destitution  caused,  under  the  modern  industrial  system,  by 
more  or  less  preventable  illness  is  scarcely  inferior  to  that  occa- 
sioned by  accidents. 

Most  of  the  arguments  used  in  the  case  of  accident  insurance 
are  therefore  applicable  to  health  insurance.  As  a  matter  of 
fact  the  first  law  on  the  subject  was  the  German  act  of  1883, 
which  provided  for  compulsory  health  insurance.  Austria 
followed  in  1888,  but  the  movement  subsequently  lagged  until 
a  new  impetus  was  given  to  it  by  the  enactment  in  191 1  of  the 
British  National  Insurance  Law.  While  we  do  not  find  in  either 
Germany  or  England  any  state  insurance  fund,  government 
control  is  rigid,  and  the  insurance  is  compulsory.  In  the  United 
States  the  compulsory  insurance  system  has  come  first  in  the 
case  of  accidents;  in  England  and  Germany  it  has  come  first  in 
the  case  of  illness. 

In  Germany  a  distinction  is  made  between  sickness  as  a  merely 
temporary  phase  and  invalidity  as  a  more  permanent  condition. 
The  sick  benefits  in  Germany  are  therefore  limited  to  a  definite 
period,  originally  thirteen  weeks,  but  changed  in  1903  to  from 
twenty-six  to  fifty-two  weeks.     This  method  has  been  followed 


§250]  Sickness  Insurance  661 

in  all  of  the  other  countries  except  in  England,  where  the  na- 
tional insurance  act  provides  benefits  unlimited  in  time.  The 
strictly  sickness  benefit,  however,  lasts  even  in  England  only 
for  twenty-six  weeks. 

In  the  second  place,  the  insurance  premiums  are  divided  in 
Germany  between  the  employer  and  the  employee,  the  former 
defraying  one-third  and  the  latter  two-thirds  of  the  cost,  the 
premiums  being  affixed  weekly  to  the  cards  by  means  of  stamps. 
Under  the  British  act  the  state  also  makes  a  contribution,  thus 
recognizing  more  specifically  the  essential  social  character  of 
the  scheme.  The  state  makes  a  weekly  payment  of  2d.,  the 
employer  3d.,  and  the  wage  earner  3d.  in  the  case  of  women  and 
4d.  in  the  case  of  men.  Finally,  while  the  general  basis  of  sick 
benefits  in  Germany  is  one-half  the  wage,  the  British  law  grants 
definite  amounts,  los.  a  week  to  men  and  7^5.  to  women,  with  a 
continued  payment  of  5s.  a  week  after  twenty-six  weeks.  Equally 
significant  with  the  financial  aid  are  the  provisions  of  the  British 
law  for  medical  and  surgical  benefits,  medicine  supplies  and  ap- 
pliances of  various  kinds,  and  hospital  treatment.  WhUe  there 
has  undoubtedly  been  some  malingering  or  feigned  sickness,  the 
drawbacks  of  the  system  are  overwhehningly  outweighed  by  the 
benefits. 

In  addition  to  the  sick  benefits  attention  must  be  directed  to 
the  lying-in  or  maternity  and  the  funeral  benefits.  Italy,  where 
there  is  as  yet  no  general  compulsory  sickness  insurance,  first 
introduced  a  special,  compulsory  maternity  insurance  in  1910, 
as  an  outcome  of  the  law  requiring  the  cessation  of  female  work 
for  a  month  after  childbirth.  In  England  and  Germany  provi- 
sion for  lying-in  or  maternity  benefits  is  included  in  the  general 
system. 

Health  insurance  in  the  United  States  is  thus  far  only  private 
and  voluntary.  With  the  growing  realization  on  the  part  of  the 
public  that  the  social  aspect  of  disease  is  often  more  important 
than  that  of  accidents,  it  is  to  be  expected  that  this  form  of 
social  insurance  will  before  long  be  introduced  here  also. 


662  Social  Insurance  [§  251 

251.   Old  Age  Insurance 

The  modern  importance  attaching  to  old  age  is  due  to  the 
speeding  up  of  the  new  industrial  system  and  to  the  great  diminu- 
tion in  the  period  of  life  during  which  full  wages  can  be  earned. 
Not  only  is  the  age  limit  at  which  applicants  for  work  are  taken 
on  continually  being  reduced,  but  the  strain  of  modern  machinery 
frequently  induces  a  premature  weakening  of  the  capacity  for 
work  which  accentuates  the  normal  disadvantage  of  natural 
old  age.  So  much  pauperism  has  resulted  that  the  problem  of 
insurance  against  old  age  is  now  everywhere  coming  to  the 
front. 

The  earliest  forms  of  such  insurance  were  entirely  of  a 
voluntary  character.  In  the  middle  of  the  nineteenth  century, 
however,  France  instituted  a  system  designed  to  encourage  indi- 
vidual provision  for  old  age,  to  put  old  age  pension  insurance 
upon  sound  actuarial  principles,  and  to  reduce  the  cost  to  the 
lowest  limit.  Half  a  century  later  Italy  and  Belgium  offered 
government  subsidies  to  voluntary  old  age  insurance. 

It  was  not,  however,  until  1889  that  a  national  system  of 
compulsory  old  age  insurance  was  adopted  by  Germany.  Two 
decades  later,  in  1910,  France  adopted  a  similar  system.  In 
both  countries  the  dues,  which  vary  with  wages,  are  shared 
equally  between  employer  and  employee.  The  employer  is 
required  to  attach  the  stamps  to  the  workman's  card  and  is 
permitted  to  deduct  the  one-half  from  the  wages.  In  many 
cases,  in  Germany  at  least,  employers  defray  the  entire  cost. 
The  government  bears  the  cost  of  the  central  administration, 
furnishes  the  postoffices  as  financial  agencies,  and  when  the 
pensions  have  finally  matured,  makes  a  contribution  (50  marks 
in  Germany,  100  francs  in  France).  In  Germany  the  pensions 
begin  at  70,  in  France,  since  191 2,  at  60  years  of  age.  In 
Germany  the  administration  is  in  the  hands  of  large  territorial 
institutions  under  government  supervision;  in  France  there  are 
in  addition  to  the  government   fund  mutual   benefit   societies 


§  251]  Old  Age  Insurance  663 

and  other  institutions.  In  both  countries,  however,  employees 
as  well  as  employers  are  represented  in  the  management. 

Another  method  of  meeting  the  old  age  problem  is  illustrated 
by  the  system  of  non-contributory  pensions  provided  entirely 
by  the  government.  Denmark  introduced  this  system  in  1891, 
followed  by  New  Zealand  in  1898,  and  the  Australian  states  a 
few  years  later.  In  1908,  England  adopted  this  method,  granting 
to  everyone  who  has  reached  the  age  of  70  and  whose  annual 
income  does  not  exceed  £31,  los.,  who  is  not  a  pauper,  and  who 
has  been  a  resident  at  least  twenty-five  years,  a  sum  varying  from 
IS.  to  5s.  a  week.  The  number  of  pensioners  in  England  in 
19 1 3  was  about  a  million  and  the  expenses  over  twelve  millions 
of  pounds. 

In  the  United  States  the  discussion  has  only  just  begun. 
Until  recently  the  recognition  of  its  need  was  very  imperfect. 
As  late  as  19 10  the  Massachusetts  Commission  advanced  the 
following  objections:  (i)  heavy  expenses;  (2)  moral  effect  upon 
the  character  in  destroying  the  habit  of  thrift;  (3)  disintegrating 
influences  on  the  family;  and  (4)  harmful  effect  upon  wages. 
These  criticisms,  however,  are  not  substantiated  by  the  experi- 
ence of  the  European  countries  which  have  adopted  the  system. 

A  variation  of  the  movement  has  recently  been  spreading  in 
the  United  States  in  the  shape  of  the  widows'  pensions.  From 
the  very  beginning  of  the  old  age  insurance  system,  attention 
was  directed  to  the  necessities  of  the  surviving  dependents. 
Even  in  the  original  German  law,  where  financial  conservatism 
was  at  the  outset  necessary,  a  provision  was  inserted  by  which 
there  are  returned  to  the  widows  or  orphans  all  contributions 
made  by  a  workman  if  he  dies  before  receiving  a  pension.  A 
similar  section  was  inserted  in  the  French  law  of  1910,  with  an 
additional  provision  for  death  benefits,  varying  from  150  to  300 
francs.  In  191 1,  however,  in  the  general  revision  of  the  insur- 
ance laws  Germany  added  a  comprehensive  national  system  of 
widows'  and  orphans'  pensions. 

In   the   United   States   the   first   mothers'   pensions   act   was 


664  Social  Insurance  [§  252 

passed  by  Illinois  in  191 1.  Two  states  followed  in  191 2,  four- 
teen more  in  1913.  By  1919  the  system  had  spread  throughout 
the  country.  Although  popularly  called  mothers'  pensions  they 
are  really  pensions  for  dependent  children  to  be  paid  to  the 
widows  or  wives  of  deserting,  disabled,  or  imprisoned  husbands. 
As  an  entering  wedge  for  a  broader  application  of  the  principles 
of  social  insurance,  the  movement  for  mothers'  pensions  is 
significant. 

252.   Invalidity  Insurance 

By  invalidity  is  meant  incapacity  to  earn  wages  through 
physical  weakness.  Invalidity  may  be  the  result  not  only  of 
accident,  but  of  sickness,  or  old  age.  Accordingly  it  is  dealt 
with  as  a  part  sometimes  of  sickness  insurance,  sometimes,  as  in 
France,  of  old  age  insurance.  As  the  sick  pensions  almost 
everywhere  cease  at  the  expiration  of  a  short  period,  and  as  old 
age  pensions  do  not  begin  until  the  attainment  of  a  definite  age, 
there  is  evident  need  of  caring  for  cases  of  invalidity  which 
are  not  relieved  by  some  form  of  accident  compensation. 

The  conception  of  invalidity  as  found  in  some  of  the  European 
laws  is  total  and  permanent  disability  to  earn  a  living.  This  is 
true  of  England  under  the  national  insurance  act  of  191 1,  one  of 
the  objects  of  which  is  stated  to  be  "to  provide  for  insurance 
against  loss  of  health."  Here,  it  will  be  remembered,  the  sickness 
benefit  ceases  after  26  weeks.  It  may  then  be  followed  by  a 
"disablement  benefit"  of  5s.  a  week  payable  after  two  years' 
weekly  insurance  contributions,  and  continued  as  long  as  the 
laborer  is  "rendered  incapable  of  work  by  the  disease  or  disable- 
ment." The  chief  criticism  of  this  provision  is  the  difficulty 
that  will  be  encountered  in  interpreting  the  term  "incapable 
of  work."  The  old  phrase  "able-bodied"  in  the  English  poor 
law  proved  to  be  a  thorn  in  the  flesh  of  the  commissioners  and 
much  the  same  may  be  expected  from  the  new  term.  In  France 
the  insured  is  permitted  to  demand  the  beginning  of  his  old  age 
pension  at  55  instead  of  60,  but  with  a  corresponding  actuarial 


§  253]  Unemployment  Insurance  665 

reduction  in  the  amount  of  the  pension.  Furthermore,  anyone 
suffering  from  a  permanent  and  total  disability  may  secure  in 
addition  to  special  invalidity  subsidies  an  immediate  liquidation 
of  his  old-age  pension  under  these  rules. 

In  Germany,  on  the  other  hand,  there  is  a  separate  system  of 
invalidity  insurance;  and  invalidity  is  not  confined  to  total  and 
permanent  disability  to  earn  a  living.  On  the  contrary  a  re- 
duction of  the  earning  capacity  to  one-third  of  the  normal  is 
sufficient  to  establish  invalidity,  which  may  come  from  either 
sickness  or  incipient  old  age.  An  invalidity  pension,  ranging 
from  no  to  300  marks,  may  be  obtained  after  200  weeks  of 
insurance,  even  though  but  100  weekly  contributions  have  been 
made,  or  after  500  weeks  of  insurance,  irrespective  of  the  number 
of  contributions.  As  a  consequence  anyone  whose  illness  lasts 
for  more  than  26  weeks  is  turned  over  from  the  sickness  to  the 
invalidity  fund,  and  even  if  he  has  not  had  any  disease,  ap- 
proaching old  age  will  enable  him  to  take  advantage  of  the 
invalidity  pension.  Invalidity  pensions  are  hence  becoming 
more  popular  than  the  old-age  pensions. 

Congress  established  in  1920  a  system  of  compulsory,  con- 
tributory old  age  and  disabiUty  insurance  for  employees  in  the 
classified  civil  service.  As  the  discussion  develops,  much  will 
be  learned  from  a  comparison  of  the  foreign  methods. 

253.   Unemployment  Insurance 

Perhaps  the  most  baffling  of  modern  labor  problems  is  unem- 
ployment. In  1900  in  the  United  States  there  were  about  six 
and  a  half  million  workers  unemployed  for  more  than  a  month, 
and  of  these  about  two  and  a  half  millions  were  unemployed 
from  four  to  sLx  months,  and  about  three-quarters  of  a  million 
between  seven  and  twelve  months.  As  Mr.  Beveridge  has 
stated:  "The  problem  of  unemployment  lies,  in  a  very  special 
sense,  at  the  root  of  most  other  social  problems." 

That  there  is  a  personal  factor  in  unemployment  is  undoubted. 
Some  are  inefficient;  some  like  the  hobo,  the  tramp,  and  the 


666  Social  Insurance  [§253 

criminal  are  altogether  unemployable.  But  far  more  important 
than  this  is  the  social  or  industrial  factor  —  the  unemployment 
due  to  the  organization  of  modern  industry.  Unemployment 
is  due  largely  to  fluctuations  in  industry,  of  which  there  are  four 
chief  categories: 

(i)  Periods  of  prosperity  and  depression.  The  problem  of 
crises  and  business  cycles  has  been  discussed  above  (§  209). 

(2)  Short-time  fluctuations  due  to  seasonal  trades,  that  is, 
trades  active  for  only  a  part  of  the  year  or  more  active  in  one 
season  than  in  another.  The  cause  of  this  is  either  directly  or 
indirectly  weather  conditions. 

(3)  Fluctuations  in  the  casual  trades,  where  the  labor  contract 
is  made  for  only  a  few  weeks,  a  few  days,  or  even  a  few  hours,  as 
in  the  case  with  dock  laborers,  lumberjacks,  etc. 

(4)  Fluctuations  due  to  the  disappearance  of  old  and  the 
creation  of  new  industries,  as  a  result  of  mutations  in  business 
fortunes,  of  change  of  fashion,  or  of  inventions. 

The  last  point  is  the  one  to  which  least  attention  has  hitherto 
been  paid.  Yet  it  was  emphasized  over  three  quarters  of  a 
century  ago  in  the  following  passage:  "Humanity  and  justice 
to  man  demand  that  those  who  themselves  suffer  for  the  public 
good  should  be  relieved  at  the  public  expense.  Whenever  a 
new  application  of  mechanical  power  throws  a  particular  class  of 
operatives  out  of  employment,  a  national  fund  should  be  pro- 
vided to  aid  them  in  betaking  themselves  to  other  occupations. 
It  is  a  disgrace  to  the  legislature  of  the  country  that  the  enormous 
body  of  hand-loom  weavers  should  have  been  left  so  long  in 
misery  and  destitution  and  toiling  to  death  in  the  hopeless 
competition  with  the  power  loom."^ 

The  problem  of  the  unemployable  is  a  problem  of  the  defec- 
tive and  the  criminal  classes.  The  problem  of  the  unemployed, 
is  that  of  the  able-bodied  man  willing  to  work  but  unable  to 
find  a  chance. 

Three  suggestions  have  been  made  to  lessen  unemployment 
iTorrens,  On  Wages  (1834),  p.  34. 


§  253]  Unemployment  Insurance  667 

First,  is  the  creation  of  public  employment  exchanges.  We 
frequently  find  an  oversupply  of  labor  in  some  industries,  coupled 
with  a  simultaneous  undersupply  in  others.  In  the  United 
States  farmers  are  often  crippled  for  help  when  industries  not 
far  off  are  working  on  half  time.  The  object  of  the  public 
employment  bureaus  is,  as  it  has  been  expressed,  to  bring  to- 
gether the  jobless  man  and  the  manless  job.  In  the  United 
States  this  phase  of  the  problem  is  being  attacked  by  both 
state  and  federal  legislation. 

The  second  suggestion  is  the  regularization  of  employment. 
The  cyclical  fluctuations  do  not  perhaps  at  present  lend  them- 
selves to  regulative  action;  but  it  is  different  with  the  seasonal 
and  the  casual  trades.  Not  a  little  can  be  accomplished  by  pri- 
vate effort  and  through  carefully  devised  regulation  to  spread 
more  equally  over  a  whole  year  the  activity  which  is  now  found 
only  in  spurts.  In  casual  trades,  like  the  docks,  English  ex- 
perience has  shown  that  a  simple  change  in  the  method  of 
engaging  the  laborers  may  bring  about  a  far  greater  regularity 
in  employment. 

Thirdly,  the  development  of  vocational  schools  may  do  much 
to  diminish  the  horde  of  ill-prepared  young  people  whose  onset 
into  industry  often  accentuates  the  difficulties  of  irregularity  of 
employment. 

The  above  methods,  designed  to  diminish  irregularity,  are 
preventive.  But  in  so  far  as  the  irregularity  persists,  the 
resulting  evils  may  largely  be  obviated  by  attacking  the  uncer- 
tainty itself  through  insurance.  Unemployment  or  out-of-work 
insurance  is  of  three  kinds  first,  subsides  paid  by  govern- 
ment to  the  insurance  funds  of  trade  unions,  known  as  the 
Ghent  system,  because  first  employed  in  the  city  of  Ghent  in 
1900,  and  since  then  imitated  in  many  other  places.  Secondly, 
we  find  the  system  of  government  unemployment  funds  where 
the  government  itself  organizes  the  insurance  institution  and 
offers  its  benefits,  including  a  financial  subsidy,  to  the  workman. 
Such  a  fund  was  started  by  Berne  in  1893,  followed  in  1896  by 


668  Social  Insurance  [§  253 

Cologne,  and  other  cities.  The  third  method  is  the  system  of 
compulsory  insurance  for  all  workmen.  This  was  initiated  in 
1894  by  St.  Gall,  although  abandoned  after  a  short  time.  In 
191 1,  however,  the  English  national  insurance  act  introduced 
this  system  on  a  huge  scale. 

The  English  law  applies  to  seven  trades  where  the  evils  of 
unemployment  have  been  the  greatest:  building,  construction 
of  works,  ship  building,  mechanical  engineering,  iron  foundries, 
construction  of  vehicles,  and  saw  milling.  The  Board  of  Trade 
however,  has  the  power  under  certain  conditions  to  extend  the 
provisions  of  the  act  to  other  trades.  The  number  of  workmen 
in  these  trades  is  calculated  at  about  two  and  a  half  millions. 
Every  employee  must  deposit  an  insurance  book  with  the  em- 
ployer who  is  obligated  to  pay  the  insurance  premium  by  affixing 
weekly  a  5d.  stamp,  one-half  of  which  he  may  deduct  from  the 
wages.  The  government  adds  one-third  of  the  total  contribu- 
tions received;  or,  in  other  words,  contributes  one-quarter  while 
the  employer  and  the  employee  together  pay  three-quarters  of 
the  total  premium.  The  unemployment  benefit,  of  ys.  a  week 
and  limited  to  fifteen  weeks  in  any  year,  begins  after  the  first 
week  of  unemployment.  In  the  case  of  strikes  the  benefit 
ceases.  The  government  offers  a  subsidy  to  trades  unions  that 
provide  additional  unemployment  insurance.  After  a  man  has 
reached  the  age  of  60  and  has  paid  500  weekly  contributions,  he 
may  receive  back  with  interest  all  that  he  has  paid  in,  less  what 
has  been  received  as  benefits.  Finally,  employers  who  h^ve 
kept  their  workmen  continuously  employed  for  a  year  may 
claim  a  refund  of  one-third  of  their  payments  at  the  end  of  the 
year. 

The  English  law  is  the  latest  and  most  interesting  attempt  to 
deal  with  the  evils  of  unemployment  on  a  gigantic  scale.  Its 
operation  will  be  watched  with  the  greatest  interest,  and  it  may 
fairly  be  surmised  that  it  will  before  long  be  followed  by  other 
countries,  including  the  United  States. 


CHAPTER  XXXIX 
POVERTY   AND  PROGRESS 

254.   References 

In  General:  Charles  Booth,  Life  and  Labour  of  the  People  in  London 
(17  vols.,  new  ed.,  1902);  B.  S.  Rowntree,  Poverty;  A  Shidy  in  Tou'n 
Life  (1901)  and  The  Human  Needs  of  Labour  (1918);  M.  Parmelee, 
Poverty  and  Social  Progress  (1916);  J.  A.  Hobson,  Problems  of  Poverty 
(1891)  and  Work  and  Wealth  (1914);  H.  Fawcett,  Pauperism;  Its  Causes 
and  Remedies  (1871);  C.  B.  Spahr,  Distribution  of  Wealth  in  the  United 
States  (1896);  C.  D.  Wright,  Practical  Sociology  (1914),  chs.  xviii,  xxv; 
W.  Smart,  The  Distribution  of  Income  (1899),  bk.  ii,  ch.  viii;  B.  and 
S.  Webb,  The  Prevention  of  Destitution  (191 1);  F.  H.  Streightoff,  The 
Distribution  of  Incomes  in  the  U.  S.  (191 2);  W.  I.  King,  The  Wealth  and 
Income  of  the  People  of  tlie  U.  S.  (1915). 

Descriptions  of  Poverty:  C.  B.  Spahr,  America's  Working  People 
(1900);  W.  A.  Wyckoff,  The  Workers  (189 7- 1899);  J.  A.  Riis,  How  the 
Other  Half  Lives  (1890),  and  Tlie  Battle  with  the  Slum  (1902);  Hull  House 
Maps  and  Papers  (1895);  A.  M.  Simons,  Packingtown  (1899);  P.  Roberts, 
The  Anthracite  Coal  Communities  (1904);  The  Pittsburgh  Survey  (6  vols., 
1910-1912),  Bowley  and  Burnett,  Livelihood  and  Poverty  (1915);  C.  B. 
Barnes.  The  Longshoremen  (1915). 

Luxury:  E.  de  Lavelcye,  Luxury  (1891);  H.  M.  Thompson,  The 
Purse  arui  the  Conscience  (1891). 

Cost  of  Living:  W.  O.  Atwater,  Principles  of  Nutrition  and  Nutri- 
tive Value  of  Food  (Farmers'  Bulletin,  no.  142,  rev.  ed.,  1902),  and  The 
Chemical  Composition  of  American  Food  Materials  {Bulletin,  no.  28,  rev. 
ed.,  1899);  Atwater  and  Benedict,  Experiments  in  the  Metabolism  and 
Energy  in  the  Human  Body,  1900-1902;  L.  B.  More,  Wage  Earners' 
Budgets  (1907);  T.  Ryan,  A  Living  Wage  (1907);  WartinK  Changes 
in  tlie  Cost  of  Living,  igi4-igig  (National  Industrial  Conference  Board, 
1919);  F.  H.  StreightofT,  The  Standard  of  Living  among  the  Industrial 
People  of  America  (1911);  F.  Franklin,  The  Cost  of  Living  (1915);  Stand- 
ards of  Living:  a  Compilation  of  Budgetary  Studies  (rev.  ed.,  1920),  pub. 
hy  Bureau  of  Applied  Economics. 

Poor  Laws  and  Charity:  J.  Nicholls,  History  of  the  English  Poor 
luiw  (1854,  new  ed.,  1904);  A.  J.  Warner,  American  Charities  (2d  ed., 
1908);  £  W,  Capen,  Historical  Development  of  the  Poor  Law  of  Connecti- 

669 


670  Poverty  and  Progress  [§  255 

cid  (1904) ;  E.  T.  Devine,  The  Principles  of  Relief  (1904)  and  Misery  and 
its  Causes  (1909);  J.  Lee,  Constructive,  and  Preventive  Philanthropy 
(1902);  Committee  of  Fifteen,  Report  on  the  Social  Evil  (191 2);  National 
Conference  of  Charities  and  Corrections,  Annual  Reports  (1874 — ). 

255.   Luxury 

In  our  study  of  the  distribution  of  wealth  attention  was 
devoted  primarily  to  the  shares  of  the  various  classes  in  distri- 
bution. To  the  individual,  however,  the  share  of  the  total 
product  that  accrues  to  the  particular  class  is  of  slight  conse- 
quence when  compared  to  his  own  participation  in  this  share. 
The  economic  problem  to  him  is  as  to  the  amount  of  wealth 
that  he  personally  can  secure.  To  the  community  as  a  whole, 
also,  it  makes  a  great  difference  whether  a  given  sum  of  wealth 
is  shared  in  an  approximately  equal  fashion  among  its  separate 
members  or  whether  a  minority  lives  in  affluence  and  the  mass 
in  squalor.  The  coexistence  of  luxury  and  poverty  has  always 
been  the  stumbling-block  of  the  social  reformer.  To  this  most 
baffling  question  we  must  now  turn  our  attention,  although 
almost  every  one  of  the  preceding  chapters  has  indirectly  touched 
upon  the  same  subject. 

The  problem  of  luxury  in  itself,  and  not  considered  as  a 
concomitant  of  poverty,  involves  few  difficulties.  The  discus- 
sion, however,  has  often  been  one-sided;  for  here  as  elsewhere 
extremists  have  not  been  lacking.  The  apologists  for  luxury, 
for  example,  have  from  time  immemorial  sought  to  justify 
themselves  by  the  plea  that  luxurious  expenditure  is  beneficial 
because  it  affords  employment  to  labor.  The  merest  tyro  in 
economic  reasoning,  however,  will  at  once  perceive  the  weak- 
ness of  this  hoary  argument.  If  luxurious  expenditure  is 
productive  simply  because  it  employs  labor,  the  accidental 
breaking  of  a  window-pane  or  the  wanton  destruction  of  a 
growing  crop  is  also  productive  in  so  far  as  it  will  require  labor 
to  repair  the  damage.  The  fallacy  clearly  consists  in  the 
assumption  that  the  wealth  spent  in  luxurious  outlay  would 
otherwise  not  be  devoted  to  production.     Obviously,  however, 


§255]  Luxury  671 

if  the  spendthrift  chooses  not  to  waste  his  funds,  they  will  take 
the  form  of  the  purchase  of  securities,  of  investment  in  some 
enterprise  or  of  a  cash  balance  in  the  bank;  and  in  each  case 
they  will  ultimately  be  devoted  to  production  and  thus  give 
employment  to  labor. 

On  the  other  hand,  the  opponents  of  luxury  go  to  an  equally 
extravagajit  length.  "Plain  living  and  high  thinking''  is  indeed 
a  most  admirable  moral  precept,  inattention  to  which  has  re- 
sulted in  the  ruin  of  many  an  individual.  The  evils  of  ostenta- 
tion and  the  passions  of  sensuality  are  as  glaring  as  they  are 
reprehensible.  From  a  broader  point  of  view,  however,  plain 
living  may  be  carried  to  an  extreme.  Civilization,  as  we  learned 
at  the  very  outset  of  this  treatise,  depends  on  the  multiplication 
of  wants.  If  goods  are  to  be  divided  into  necessaries,  con- 
veniences and  superfluities,  progress  may  be  described  as  the 
process  of  converting  superfluities  into  conveniences  and  con- 
veniences into  necessities.  The  diversification  of  consumption 
lies  at  the  root  of  human  development.  It  is  undoubtedly  true 
that  we  can  have  no  lasting  progress  without  the  accumulation 
of  capital  and  the  application  of  labor  to  raw  material;  but  it 
is  equally  evident  that  while  a  population  every  member  of 
which  is  devoted  entirely  to  wheat-raising  or  to  the  making  of 
rough  clothes  or  shelter  may  be  very  estimable,  it  will  indis- 
putably be  lacking  in  many  of  the  qualities  that  we  associate 
with  higher  civilization.  It  would,  to  mention  nothing  else, 
leave  no  room  for  the  whole  domain  of  art,  which  is  in  some 
respects  the  supreme  achievement  of  the  human  race.  Yet  no 
one  will  make  fine  or  beautiful  things  unless  there  is  a  demand 
for  them,  and  this  demand  necessarily  implies  luxury  some- 
where. Thus  we  seem  to  reach  the  position  that  luxury  is  evil 
and  at  the  same  time  indispensable. 

The  difficulty,  however,  is  really  not  serious.  Luxury  of  some 
kind  is  indeed  inevitable,  but  what  is  one  man's  luxury  is  another 
man's  necessity.  The  real  test  of  the  economic  legitimacy  of 
luxury  is  the  relation  between  the  economic  importance  of  the 


672  Poverty  and  Progress  [§  255 

outlay  and  the  economic  importance  of  the  result  to  the  commu- 
nity as  a  whole.  If  a  particular  individual  is  markedly  important 
for  the  community,  society  will  not  and  ought  not  to  begrudge 
him  a  more  or  less  lavish  expenditure  in  keeping  with  its  estimate 
of  his  public  importance.  There  is  usually  a  close  relation  be- 
tween consumption  and  production.  It  is  true  that  in  a  young 
country  like  the  United  States  men  will  often  accumulate  wealth 
for  the  sake  of  power  and  lead  comparatively  simple  and  busy 
lives.  Almost  everywhere  else,  however,  it  is  a  fact,  and  even  in 
the  United  States  it  is  a  tendency,  for  people  who  acquire  wealth 
easily  to  spend  it  lavishly.  To  the  extent,  therefore,  that  con- 
sumption is  the  objective  point  of  production,  the  prohibition  of 
luxury  would  be  apt  to  work  as  an  impediment  to  enterprise, 
and  what  would  be  gained  at  one  end  would  be  lost  at  the  other. 
From  this  point  of  view  the  luxury  of  an  individual  who  is  eco- 
nomically important  in  the  sense  that  he  is  adding  materially 
to  the  productive  forces  of  the  community  is  justifiable. 

Luxury  as  a  legitimate  economic  phenomenon  may,  however, 
be  abused  by  those  who  possess  the  wealth  or  power  without 
enjoying  the  real  social  importance.  They  spend,  but  give 
nothing  in  return.  In  the  case  of  private  individuals  the  most 
obvious  example  is  the  man  who  has  received  a  large  fortune 
by  gift  or  inheritance  and  who  has  done  and  is  doing  nothing 
of  value  to  the  community.  Luxury  of  this  kind  is  economi- 
cally injurious.  But  luxury  may  also  be  associated  with  the 
government.  Where  there  is  an  absence  of  constitutional 
liberty,  the  individual  potentate  may  abuse  the  privilege,  and 
we  reach  a  situation  like  that  in  the  time  of  Louis  XIV  in  France, 
where  the  luxury  of  the  court  proved  to  be  a  heavy  burden 
to  the  people.  In  a  democracy,  however,  this  danger  does  not 
exist,  and  there  is  even  a  risk  of  going  too  far  in  the  opposite 
direction.  The  president  of  republican  France  indeed  receives 
a  special  allowance  for  entertainments;  but  the  lack  of  suitable 
homes  and  adequate  salaries  for  American  diplomatic  represen- 
tatives abroad  has  long  been  a  national  mortification. 


§  255]  Luxury  673 

The  real  economic  ideal  is  the  socialization  of  luxury,  in  the 
sense  either  that  private  luxury  should  give  way  to  public  luxury, 
or  that  the  luxury  of  the  individual  should  be  confined  to  those 
who  are  of  true  importance  to  the  community  and  who  are 
transfused  by  the  sense  of  social  responsibility.  The  economic 
test  of  all  expenditure  is  the  creation  of  a  surplus  of  satisfactions. 
The  wider  the  range  of  the  participants  in  a  given  expenditure, 
the  greater  the  surplus.  Artistic  and  beautiful,  even  if  expen- 
sive, things  are  indeed  desirable;  but  to  accomplish  the  greatest 
economic  as  well  as  ethical  good,  their  enjoyment  should  not 
be  monopolized  by  the  few.  In  classic  Greece  the  choicest 
sculptures  and  paintings  were  displayed  in  the  streets  and 
temples;  and  even  in  modern  times  the  public  galleries  are 
assuming  continually  greater  dimensions.  Where  the  principle 
of  the  public  trusteeship  of  private  wealth  has  permeated  the 
community  we  find,  as  in  a  few  of  the  European  cities,  that  the 
private  galleries  are  so  only  in  name,  and  that  they  are  peri- 
odically, if  not  continuously,  thrown  open  to  the  public. 

Thus  the  economic  view  of  luxury  does  not  really  differ  from 
the  ethical.  From  the  moral  point  of  view  the  self-indulgent 
luxury  of  the  mere  sensualist  is  always  to  be  deprecated:  a  pri- 
vate Maecenas  is  relatively  defensible;  but  a  public  Maecenas  is 
still  more  admirable.  From  the  economic  point  of  view,  the  test 
is  the  importance  to  society  of  the  luxurious  outlay.  The  luxury 
of  a  mere  faineant  is  always  an  economic  loss;  the  luxury  of  the 
individual  who  has  honestly  acquired  his  wealth,  who  has  been 
spurred  on  to  activity  by  the  thought  of  the  ultimate  reward, 
and  who  has  succeeded  by  serving  the  community  is  relatively 
defensible;  but  public  luxury  or  the  luxury  of  the  same  individual 
when  he  devotes  his  wealth  to  public  purposes  is  a  more  distinct 
economic  gain,  because  with  the  same  outlay  of  effort  there  is 
now  a  greater  enjoyment,  and  thus  a  greater  surplus  of  utility. 
In  both  public  and  private  expenditure,  however,  great  care  must 
be  exercised  not  to  carry  luxury  to  an  extreme.  Ethically  the 
danger  is  that  the  aesthetic  element  may  be  engulfed  in  sensual- 
43 


6/4  Poverty  and  Progress  [§  256 

ity;  economically  the  clanger  is  that  the  surplus  or  the  wealth  of 
the  community  may  be  whittled  down  by  increasing  consump- 
tion at  the  expense  of  production. 


256.   The  Facts  of  Poverty 

Poverty,  like  luxury,  is  a  matter  of  degree.  Yet  from  one  point 
of  view  we  may  contrast  absolute  with  relative  poverty.  Abso- 
lute poverty  may  be  defined  as  that  condition  where  the  income 
is  insufficient  for  the  bare  minimum  necessary  to  maintain  phys- 
ical efficiency.  Relative  poverty,  on  the  other  hand,  would  be 
the  inability  to  maintain  the  standard  of  life  which  in  civilized, 
countries  includes  something  more  than  mere  subsistence. 

Poverty  depends  on  the  relation  of  income  to  the  cost  of  liv- 
ing. It  is  therefore  a  matter  of  considerable  importance  to  de- 
termine on  the  one  hand  the  income  and  on  the  other  the  ex- 
tent and  the  elements  of  the  cost  of  living.  Unfortunately  the 
material  at  our  disposal  is  exceedingly  inadequate,  except  as  to 
the  proportion  of  elements  in  expenditure. 

As  to  these  the  three  fundamental  expenses  are,  in  their  order 
of  importance,  the  expense  for  food,  shelter  and  clothing.  Sev- 
eral decades  ago,  the  German  statistician,  Engel,  made  some  cal- 
culations as  to  the  percentages  of  various  items  of  expenditure. 
More  recently  the  United  States  Bureau  of  Labor  has  conducted 
elaborate  investigations.  Taking  several  thousands  of  normal 
families  classified  according  to  their  income,  the  bureau  found 
the  percentage  of  expenditures  in  1901  to  be  as  shown  in  the  table 
on  the  following  page.^  The  same  facts  are  illustrated  graphi- 
cally in  the  chart  opposite  page  674. 

These  results  in  the  main  confirm  those  obtained  by  Dr.  Engel, 
although  there  are  some  discrepancies.  Dr.  Engel's  propositions 
were  as  follows:  — 

(i)     The  greater  the  income,  the  smaller  the  percentage  of 

^  United  States  Bureau  of  Labor,  Eighteenth  Annual  Report,  Cost  of 
Living  and  Retail  Prices  of  Food,  1904,  p.  loi. 


PER  CENT  OF  TOTAL  EXPENDITURE   MADE  FOR  VARIOUS  PURPOSES  IN 
NORMAL  FAMILIES  IN  THE  UNITED  STATES,  1901.  BY  SIZE  OF  INCOME. 

INCOME 

20                       .10                      00                       SO 

1 

UNDER  $200 

1 

■ 

$200  TO  $300. 

^P 

1 

$300  TO  $400 

^1 

1 

$400  TO  $500 

^p 

$500  TO  $600 .__ 

^H 

1 

00  TO  $700 

WK^^M 

1 

"00  TO  $800________ 

<i;800  TO  $900 

$900  TO  $1000 

$1000  TO  $1100 

WKKtft^M 

$1100  TO  $1200 

$1200  AND  OVER 

ALL  SIZES  OF  INCOME 

^P_ 

■■     FOOD                        '  IBB    CLOTHING 
1 1     RENT                          1 I     FUEL 

1         1     LIGI- 
1         1     SUNC 

TING 
)RIES 

From  Bulletin  o'  U  S.  Bureau  of  Labor,  No.  54  ( 1  904;. 


256] 


The  Facts  of  Poverty  675 

This  is  confirmed  by  the  American  in- 


outlay  for  subsistence, 
vestigation. 

(2)  The  percentage  of  outlay  for  clothing  is  approximately 
the  same,  whatever  the  income.  This  is  not  confirmed  in  Amer- 
ica, where  the  highest  class  spends  relatively  twice  as  much  as 
the  lowest  class. 

(3)  The  percentage  for  lodging  or  rent  and  for  fuel  and 
lighting  is  approximately  the  same  whatever  the  income.     In 


Classified 
Income 

Rent 

Fuel 

Light- 
ing 

Food 

Clothing 

Sundries 

Total 

Under  $200 

16.93 

6.69 

1.27 

50.85 

8.68 

15-58 

100 

$200-$300 

18.02 

6.09 

I-I3 

47-33 

8.66 

18.77 

100 

$300-8400 

18.61 

5-97 

1. 14 

48.09 

10.02 

16.09 

100 

$400-8500 

18.57 

5-54 

1. 12 

46.88 

11-39 

16.50 

100 

$5oo-$6oo 

18.43 

5-09 

1. 12 

46.16 

11.98 

17.22 

100 

$600-$ 700 

18.48 

4-65 

1. 12 

43-48 

12.88 

19-39 

100 

$700-8800 

18.17 

4.14 

1. 12 

41.44 

13-50 

21.63 

100 

$800-8900 

17.07 

3-87 

1. 10 

41-37 

13-57 

23.02 

100 

$900-$ I 000 

17-58 

3-85 

I. II 

39-90 

14-35 

23.21 

100 

$IOOO-$IIOO 

17-53 

3-77 

1. 16 

38.79 

15.06 

23.69 

100 

$II00-$I200 

16.59 

3-63 

1.08 

37.68 

14.89 

26.13 

100 

$1200  or  over 

17.40 

3-85 

1. 18 

36.45 

15-72 

25.40 

100 

America  this  is  the  case  as  to  rent,  but  not  as  to  fuel,  the 
expenditures  for  which  decrease  as  income  increases,  per- 
haps because  of  better  clothing,  perhaps  because  heating  of 
large  buildings  is  more  economical  than  in  the  case  of  small 
houses. 

(4)  As  income  increases  in  amount,  the  percentage  of  out- 
lay for  sundries  becomes  greater.     This  is  confirmed. 

The  American  investigation  also  sought  to  ascertain  the 
variations  in  expenditure  according  to  the  size  of  the  family, 
and  the  result  is  shown  in  the  following  table  of  percentages 
for  a  large  number  of  families  with  an  income  of  from  $600  to 
$700: 


676 


Poverty  and  Progress 


[§256 


Object  of 
Expendi- 
ture 

No 

One 

Two 

Three 

Four 

Five 

All 

Children 

Child 

Children 

Children 

Children 

Children 

Families 

Rent.  .  . 

20.20 

18.88 

17.88 

17-93 

17-97 

17.04 

18.48 

Fuel    .. 

4-75 

4.69 

4.60 

4-58 

4-79 

4-49 

4-65 

Lighling 

1. 18 

I-I3 

1. 16 

1.02 

1.09 

.98 

1. 12 

Clothing 

12.44 

12.81 

12.82 

12.84 

13-45 

13.90 

12.88 

Sundries 

21.30 

20.58 

19-95 

18.69 

15-50 

14.97 

19-39 

Food  .  . 

40.08 

41.91 

43-59 

44-93 

47.20 

48.62 

43-48 

Total  . 

100 

100 

100 

100 

100 

100 

100 

The  percentages  of  combined  expenditure  for  2,567  families 
selected  for  detailed  investigation  were  as  follows: 


Food 42.54 

Clothing 14.04 

Rent 12.95 

Fuel 4.19 

Furniture 3.42 

Insurance 2.73 

Sickness  and  Death     .    .    .  2.67 

Liquor 1.62 

Amusements  and  Vacation  1.60 

Mortgages  on  Home    .    .    .  1.58 


Tobacco 1.42 

Labor  and  other  Organiza- 
tion Fees 1. 1 7 

Books  and  Papers    ....       1.09 

Lighting 1.06 

Religious  Purposes 99 

Ta.xes 75 

Charity 31 

Other  Purposes 5.87 

Total      100. 


When,  in  lieu  of  taking  percentages,  we  seek  to  ascertain 
the  actual  minimum  of  necessary  expenditure  for  each  pur- 
pose, exact  figures  are  unfortunately  lacking.  The  chief  sci- 
entific results  are  confined  to  the  item  of  food,  and  are  due 
to  the  investigations  of  Professor  Atwater,  published  by  the 
United  States  Department  of  Agriculture.  The  quantity  of 
food  required  is  nowadays  put  in  terms  of  protein  (one  of  the 
nutritive  ingredients  of  food)  and  potential  energy  (in  the  form 
of  heat  and  muscular  strength  yielded  by  food).  Potential 
energy  is  usually  expressed  in  heat  units  or  "Calories,"  a  calorie 
being  the  amount  of  heat  needed  to  raise  a  gram  of  water  one 
degree  Centigrade.  Atwater  has  calculated  that,  according  to  the 
muscular  work  accomplished,  food  carrying  from   100  to   150 


§  256]  The  Facts  of  Poverty  677 

grams  of  protein,  yielding  2,700-4,500  calories,  is  needed  daily. 
Men  doing  average  moderate  work  in  a  temperate  cliniiite  require 
3,500  calories,  and  women  eight-tenths  of  this  amount.  Detailed 
studies  have  also  been  made  as  to  the  nutritive  and  economic 
qualities  of  various  kinds  of  food  and  the  relation  of  nutrition  to 
waste,  careful  attention  to  which  would  enable  far  better  results 
to  be  attained  by  the  same  outlay  as  at  present.  The  American 
workman  especially  would  gain  much  by  utilizing  these  interest- 
ing results. 

The  principal  application  of  such  considerations  to  the  statis- 
tics of  poverty  has  been  made  by  Rowntree  in  his  remarkable 
study  of  conditions  in  the  town  of  York.  According  to  his  cal- 
culations, the  minimiun  necessary  expenditure  for  a  husband 
and  wife  with  three  children  in  1899  was  21s.  Sd.,  or  about  $5.25 
a  week.  On  this  basis,  and  making  allowance  for  families  of 
different  sizes,  he  arrived  at  the  startling  conclusion  that  almost 
twenty-eight  per  cent  of  the  total  population  were  living  in 
poverty,  —  that  is,  in  receipt  of  an  income  insufficient  for  the 
maintenance  of  mere  physical  efficiency.  This  was  a  striking 
and  unexpected  confirmation  of  the  conclusions  by  Booth  in 
his  magnificent  study  of  economic  and  social  conditions  in 
London,  that  thirty  per  cent  of  the  London  population  lived  in 
poverty,  below  the  necessary  minimum. 

The  unfortunate  individuals  within  the  poverty  line  are 
wretchedly  housed,  inadequately  clothed  and  underfed.  The 
results  show  themselves  directly  in  the  far  higher  average  death 
rate,  the  greatly  increased  infant  mortality,  and  the  marked 
inferiority  in  height,  weight  and  general  physical  condition. 
Of  the  indirect  influences  on  industrial  efficiency,  on  national 
character  and  on  moral  development  it  is  not  necessary  to 
speak. 

The  conditions  in  London  and  York  may  be  taken  as  fairly 
typical  of  those  in  modern  British  industrial  towns.  Similar 
comprehensive  data  for  the  United  States  are  lacking,  and  only 
the    beginnings    of    scientific    investigation    have    been    made. 


6/8  Poverty  and  Progress  [§  257 

The  conservative  conclusions  of  Dr.  Streighthoff  are  to  the  effect 
that  in  191 2  at  least  half  of  the  males  aged  sixteen  or  more, 
engaged  in  gainful  occupations  were  earning  less  than  $625  a 
year,  and  the  Federal  Report  tells  us  that  in  the  New  England 
mills  nearly  one-third  of  the  men  and  two-fifths  of  the  women, 
and  in  the  Southern  mills  nearly  one  half  of  the  men  and  over 
two-thirds  of  the  women,  were  earning  less  than  six  dollars  a 
week.  And  this  in  face  of  the  fact  that  the  minimum  living 
wage  was  estimated  in  191 2  for  the  country  at  large  at  over  $600 
a  year,  and  for  the  city  of  New  York  at  from  $800  to  $1000. 
While  detailed  figures  are  stUl  lacking,  no  one  who  is  conver- 
sant with  social  conditions  in  large  American  cities  can  doubt 
that  if  in  prosperous  England  over  a  quarter  of  the  urban  popu- 
lation is  below  the  poverty  line,  and  another  large  part  scarcely 
above  it,  the  situation  is  not  fundamentally  different  in  the 
industrial  portions  of  America.  It  is  true  that  only  one-third  of 
the  population  live  in  cities  as  against  two-thirds  in  England,  and 
it  is  indisputable  that  the  American  standard  of  life  is  higher. 
But  whether  it  is  thirty  per  cent  or  only  fifteen  per  cent  of  the 
American  urban  population  that  is  submerged  below  the  pov- 
erty line,  the  fact  that  in  our  much  vaunted  modern  civilization 
there  should  be  millions  of  human  beings  who  do  not  possess 
an  income  adequate  for  bare  physical  efficiency  is  sufficiently 

appalling. 

257.   The  Causes  of  Poverty 

The  causes  of  poverty  are  sometimes  classified  as  individual 
and  social,  or  the  result  of  misconduct  and  of  misfortune.  In 
the  first  category  are  put  such  phenomena  as  intemperance, 
habitual  indolence,  sensuality,  gambling,  ignorance,  shiftless- 
ness  and  improvidence.  This  classification,  however,  is  erro- 
neous for  a  double  reason. 

In  the  first  place,  very  little  permanent  poverty  can  be  as- 
cribed to  any  or  all  of  these  so-called  individual  causes  alone. 
They  are  almost  without  exception  found  in  conjunction  with 
some  of  the  so-called  social  causes,  and  it  is  virtually  impossible 


§  257]  The  Causes  o£  Poverty  679 

to  segregate  them  and  to  estimate  their  relative  importance 
separately  or  as  a  group.  Secondly,  the  distinction  between 
individual  and  social  causes  has  been  much  weakened  by  natural 
science  as  well  as  by  economics  and  sociology.  Many  of  the 
so-called  personal  traits,  for  instance,  have  been  shown  to  be 
the  result  of  heredity,  as  in  the  famous  families  of  the  Jukes  and 
the  Ishmaels,  every  member  of  which  to  the  number  of  several 
hundreds  was  infected  by  the  family  taint.  Still  more  im- 
portant, however,  is  the  fact  that  the  personal  and  non-hereditary 
characteristics  of  the  individual  are  in  large  measure  the  result 
of  his  environment.  It  is  a  familiar  fact  that  individual  ethics 
are  modified  by  social  ethics;  it  is  not  always  appreciated  that 
intemperance,  vice,  ignorance  and  improvidence  are  to  a  very 
great  extent  the  consequence  of  economic  and  social  surround- 
ings. If  it  be  said  that  intemperance  produces  poverty,  it  may 
equally  well  be  said  that  poverty  breeds  intemperance.  What 
could  be  more  startling  than  the  well-authenticated  fact  that 
in  many  cities  a  large  percentage  of  the  unfortunate  women  whom 
we  associate  with  the  term  social  evil  are  reduced  to  ply  their 
vocation  by  poverty  alone?  It  is  indeed  true  that  no  matter 
how  ideal  the  general  economic  conditions  may  be,  there  will 
always  be  some  individuals  who  will  sink  to  the  bottom;  and  it 
is  this  to  which  the  Bible  no  doubt  refers  when  it  teUs  us:  "The 
poor  always  ye  have  with  you."  But  to  suppose,  as  some  of  the 
prosperous  and  cynical  well-to-do  are  wont  to  assume,  that  this 
kind  of  poverty  forms  any  conspicuous  part  of  the  whole  is 
preposterous  in  the  extreme. 

A  better  classification  is  that  into  immediate  and  ultimate 
causes  of  poverty.  In  Rowntree's  careful  investigation  it  was 
found  that  where  the  family  earnings  (all  of  them  expended  on 
the  bare  necessaries  of  life,  and  not  including  other  useful  or 
wasteful  expense)  were  insufficient  for  mere  physical  efficiency, 
the  immediate  causes  were  as  follows:  death  of  chief  wage- 
earner,  15.63  per  cent;  Ulness  or  old  age  of  chief  wage-earner, 
5.1 1  per  cent;  irregularity  of  work,  5.14  per  cent;  size  of  family, 


68o 


Poverty  and  Progress 


[§257 


22.15  per  cent;  regular  but  insufficient  wages,  51.96  per  cent. 
So  far  as  the  size  of  the  family  is  concerned,  the  poverty  line  was 
constructed  on  the  basis  of  a  family  of  three  children.  Had  a 
larger  family  been  selected  as  the  average,  the  numbers  living  in 
poverty  would  naturally  have  been  correspondingly  increased. 
But  while  a  larger  family  would  involve  a  condition  of  greater 
poverty,  it  is  interesting  to  note  that  this  means  not  continuous 
poverty,  but  alternating  periods  of  dire  want  and  comparative 
comfort.  The  life  of  the  ordinary  unskilled  workman  may  be 
divided  into  several  periods.  During  childhood  he  will  be  apt 
to  live  in  poverty  until  he  as  well  as  his  brothers  and  sisters  begin 
to  contribute  to  the  family  income.  He  will  then  be  in  a  position 
to  save  and  may  continue  to  do  so  after  marriage.  When, 
however,  more  than  two  or  three  children  arrive,  he  will  again 
fall  below  the  poverty  line  and  remain  there  until  most  of  the 
children  are  old  enough  to  earn  something.  Then  commences 
the  second  period  of  less  acute  privation  which  continues  until 
the  children  marry  and  leave  him  in  old  age,  when  he  for  the  third 
time  falls  below  the  poverty  line.  This  situation  can  be  illus- 
trated in  the  following  diagram: 

CHILDREN  MARRY 
i^AND  LEAVE  HOME; 


AGE  0 


Fron>  Rowntree.  "Poverty,  A  Study  in  Town  Life." 


The  startling  fact,  however,  is  that,  even  with  an  average 
family  and  regular  work,  over  one-half  of  those  living  in  poverty 
at  any  moment  are  reduced  to  that  state  simply  because,  not- 


§  257]  The  Causes  of  Poverty  681 

withstanding  the  exercise  of  thrift,  sobriety  and  care,  the  income 
is  inadequate  for  support. 

When  we  ask  what  is  the  ultimate  cause  of  poverty,  it  is  at 
once  obvious  that  no  single  reason  can  be  separated  from  the 
others.  Modern  poverty  is  bound  up  with  the  facts  of  modern 
economic  life,  and  modern  economic  life  is  a  complex  product. 
To  select  any  characteristic  feature  of  the  present  industrial  sys- 
tem and  to  single  it  out  as  responsible  for  poverty  is  naive,  but 
worthless.  The  Malthusian  seizes  upon  redundant  population, 
the  communist  upon  private  property,  the  socialist  upon  prop- 
erty in  means  of  production,  the  single  taxer  upon  property  in 
land,  the  co-operator  upon  competition,  the  anarchist  upon  gov- 
ernment, the  anti-optionist  upon  speculation,  the  currency  re- 
former upon  metallic  money,  and  so  on.  They  all  forget  that 
widespread  poverty  has  existed  in  the  absence  of  each  one  of  these 
alleged  causes.  Density  of  population,  private  property,  compe- 
tition, government,  speculation,  and  money  have  each  been  ab- 
sent at  various  stages  of  history  without  exempting  society  from 
the  curse  of  poverty.     Each  stage  has  had  a  poverty  of  its  own. 

Nothing  is  more  natural,  but  nothing  is  more  fraught  with 
danger,  than  to  cast  a  halo  over  the  past  and  to  make  of  it  a 
golden  age.  The  poverty  of  to-day  is  sad  and  even  heartrending, 
but  to  the  student  of  economic  history  it  is  clear  that  in  the 
older  industrial  countries  at  least,  where  alone  a  fair  compari- 
son can  be  made,  the  poverty  of  to-day  is  less  than  it  was  a 
century  ago,  and  far  different  from  what  it  was  in  former  ages. 
Even  the  socialists  are  now  abandoning  their  contention  as 
to  the  gradual  pauperization  of  the  mass  of  society,  and  are 
restricting  themselves  to  the  complaint  that  the  workman  is  not 
securing  a  fair  share  of  the  undoubted  increase  of  wealth.  More- 
over, at  the  present  time  there  is  bitter  poverty  in  India,  a 
country  without  the  modern  industrial  system;  and  still  more 
acute  destitution  among  savages  who  are  ignorant  of  property  in 
land.  The  causes  of  poverty  are  as  complex  as  the  causes  of 
civilization  and  the  growth  of  wealth  itself. 


682  Poverty  and  Progress  [§  258 

258.  The  Relief  of  Poverty- 
All  remedies  for  poverty  fall  into  one  of  two  classes,  —  the 
palliative  and  the  curative,  —  the  endeavor  to  relieve  poverty 
and  the  attempt  to  prevent  poverty.  The  distinguishing  feature 
of  modern  life  is  the  growth  of  a  public  sentiment  which  seeks 
to  cope  with  the  evils  of  poverty  from  both  points  of  view. 

The  relief  of  poverty  has  taken  the  forms  of  private  and 
public  relief.  Private  charity,  again,  has  been  either  individual 
or  institutional.  We  thus  have  the  three  classes  of  individual 
relief,  private  institutional  relief  and  public  relief. 

(i)  Individual  charity,  while  incontrovertibly  of  great  weight 
in  special  cases,  is  often  likely  to  be  of  ethical  importance  to 
the  bestower  rather  than  of  economic  benefit  to  the  recipient. 
Experience  has  shown  that  indiscriminate  personal  charity  is 
frequently  ill-advised,  because  it  is  the  result  only  of  the  heart 
rather  than  of  heart  and  head  combined.  The  consequence  is 
that  it  is  just  as  likely  to  perpetuate  as  to  relieve  beggary  and 
pauperism.  The  realization  of  this  fact  has  led  to  the  replace- 
ment, or  at  all  events  to  the  supplementing,  of  personal  by 
institutional  relief. 

(2)  Institutional  private  relief  is  exemplified  by  the  char- 
itable agencies  like  benevolent  societies,  relief  and  aid  societies, 
associations  for  improving  the  condition  of  the  poor,  fatherless 
and  widows'  societies,  and  societies  for  promoting  frugality  and 
repressing  mendicancy.  Above  all,  however,  we  must  signalize 
the  charity  organization  societies  which  have  been  rapidly  de- 
veloping during  the  last  half-century.  These  are  endeavoring 
to  substitute  scientific  principle  for  hap-hazard  action,  and 
have  done  not  a  little  to  direct  the  stream  of  generosity  into 
the  right  channels.  Pauperism,  however,  either  brings  in  its 
train  or  aggravates  many  other  distressing  evils  such  as  the 
various  forms  of  disease,  unsanitary  homes,  dependent  chil- 
dren, and  liability  to  economic  and  legal  exploitation.  Num- 
berless,   therefore,    are    the    modern    institutions    like    private 


§  2s8]  Relief  of  Poverty  683 

hospitals,  dispensaries,  sanatoria,  anti-tuberculosis  leagues, 
improved  dwellings  and  model  lodging-house  companies, 
orphan  asylums,  creches,  kindergartens,  juvenile  homes,  fresh 
air  funds,  retreats  for  the  aged,  the  convalescent  and  the  in- 
curable, provident  loan  societies,  employment  agencies,  wood- 
yards  and  laundries,  industrial  colonies,  legal  aid  societies, 
peoples'  palaces  and  the  like.  Bewildering  in  their  complexity, 
the  proper  management  of  these  philanthropic  agencies  has 
become  a  distinct  profession  and  the  subject  of  a  separate  dis- 
cipline, with  a  stupendous  literature  of  its  own. 

In  former  times  institutional  philanthropy  was  to  a  large 
extent  religious  in  character.  All  the  great  religions  of  the 
world  have  inculcated  the  virtue  of  benevolence,  and  not  the 
least  contribution  of  Christianity  consisted  in  the  new  spirit  of 
universal  brotherhood  and  charity  which  it  infused  into  the 
pagan  European  world.  During  the  major  portion  of  the 
middle  ages,  in  fact,  the  charities  of  the  church  were  virtually 
the  sole  embodiments  of  organized  philanthropic  activity.  It 
was  only  after  the  Reformation,  when  the  property  of  the  church 
and  of  many  of  the  religious  orders  was  "secularized,"  that  the 
need  of  some  form  of  public  relief  was  recognized. 

(3)  The  most  important  illustration  of  public  relief  is  that 
known  as  the  Poor  Law  System.  In  England,  after  the  con- 
fiscation of  the  guilds  and  chantries  during  the  sixteenth  cen- 
tury, the  bishops  were  admonished  to  exhort  their  parishioners 
to  more  liberal  gifts  for  the  poor.  As  these  exhortations  grad- 
ually lost  their  efficacy,  it  was  finally  provided  that  in  case  of 
contumacy  the  justices  of  the  peace  might  order  an  assessment. 
Thus  did  the  voluntary  contributions  gradually  change  into 
compulsory  payments,  —  a  process  which  may  be  observed  in 
the  history  of  all  taxation.  In  1601  a  general  assessment  was 
levied  for  the  support  of  the  able-bodied  and  impotent  poor. 
In  1662  the  settlement  act  was  passed,  designed  on  the  one 
hand  to  increase  the  facility  of  relief,  but  on  the  other  to  limit 
it  strictly  to  native  inhabitants  of  the  locality.     The  act  of  1722 


684  Poverty  and  Progress  [§  258 

authorized  the  building  of  workhouses,  and  the  withholding  of 
relief  from  those  that  refused  to  enter.  Gilbert's  act  of  1782 
directed  the  local  authorities  to  find  for  the  unemployed  poor 
work  suitable  to  their  requirements  and  in  the  proximity  of 
their  homes.  The  system  reached  its  climax  in  the  act  of  1796, 
when  Parliament  followed  a  similar  resolution  of  some  justices 
of  the  peace  who  had  assembled  at  Speenhamland  in  the  pre- 
ceding year  and  authorized  outdoor  relief  for  the  necessitous  as 
a  substitute  for  the  now  discredited  workhouse  test. 

It  was  at  one  time  the  custom  to  ascribe  a  disproportionate 
influence  to  the  poor  law.  The  English  system  was  undeniably 
a  direct  premium  on  improvident  marriage  and  lack  of  frugal- 
ity. But  the  oft  repeated  assertion  that  it  impoverished  the 
comfortable  and  perpetuated  the  miserable  is  clearly  an  ex- 
aggeration. The  situation  at  the  close  of  the  eighteenth  and 
beginning  of  the  nineteenth  centuries  was  indeed  deplorable; 
but,  as  we  know,  it  was  very  largely  the  result  of  the  abuses 
connected  with  the  transition  from  the  domestic  to  the  factory 
system.  The  poor  law  played  its  part,  but  after  all  a  relatively 
inconspicuous  part,  in  maintaining  the  degradation  of  the 
working  classes.  In  the  same  way  the  great  reform  of  the  poor 
law  in  1834,  by  which  outdoor  relief  was  abolished,  was  only 
one  of  the  many  ameliorative  movements  which  revolutionized 
the  condition  of  the  laborers  in  the  second  quarter  of  the  cen- 
tury, such  as  the  abolition  of  the  conspiracy  acts,  the  passage 
of  the  factory  laws,  the  repeal  of  the  corn  laws,  the  reform 
of  taxation,  and  the  growth  of  democracy.  The  old  poor  law 
did  not  create  English  poverty,  and  the  new  poor  law  did  not 
abolish  it. 

In  the  United  States,  where  pauperism  has  been  for  obvious 
reasons  less  acute,  the  two  salient  features  of  the  poor-law  sys- 
tems have  been  the  almshouse  and  outdoor  relief.  Public  out- 
door relief,  however,  has  been  substantially  arbolished  in  some 
of  the  larger  Eastern  cities,  like  New  York,  Philadelphia,  Balti- 
more and  Washington,  with  distinctly  good  results.     A  consider- 


§  259]  Prevention  of  Poverty  685 

ation  of  the  relative  merits  of  public  and  private  relief,  which 
is  becoming  the  subject  of  warm  discussion  in  many  parts 
of  the  United  States,  would  however  lead  us  too  far  astray; 
for  the  controlling  considerations  are  not  primarily  economic 
in  character. 

259.   The  Prevention  of  Poverty 

We  have  seen  that  there  is  no  single  cause  of  poverty;  there 
can  accordingly  be  no  single  preventive  of  poverty.  The  naive 
and  simple  remedies  that  are  commonly  advanced  may  be  re- 
duced in  their  practical  operation  to  two,  —  a  diminution  of 
population  and  a  diminution  of  wealth. 

After  the  discussion  in  chapter  iv.  the  suggestion  that  pov- 
erty can  be  abolished  by  checking  population  scarcely  needs 
any  further  comment.  Human  beings  are  producers  as  well 
as  consumers,  and  under  proper  conditions  an  increase  of 
population  may  be  entirely  compatible  with  an  increase  of 
general  wealth.  Nothing  is  more  indisputable  than  that  num- 
bers have  increased  and  relative  poverty  has  decreased  in 
many  modern  countries. 

The  diminution  of  wealth,  on  the  other  hand,  is  in  itself 
never  advanced  as  a  remedy,  for  that  would  be  too  obviously 
absurd.  But  all  the  other  naive  remedies  for  poverty  are  prac- 
tically tantamount  to  this.  To  the  attentive  reader  of  the 
preceding  chapters  it  should  be  abundantly  clear  that  private 
property  and  individual  initiative  have  been  the  motor  forces 
of  the  accumulation  of  wealth  and  the  real  progress  of  humanity. 
Anything  therefore  which  seriously  saps  these  foundations  neces- 
sarily undermines  not  only  the  whole  structure  of  industrial 
society  but  the  edifice  of  civilization  itself.  Anarchism  would 
abolish  government,  but  in  so  doing  would  rob  society  of  the 
fundamental  protection  which  enables  it  to  exist  in  peace. 
Communism  would  level  distinctions  of  wealth,  but  in  eliminat- 
ing private  property  would  destroy  progress.  The  restriction 
of  large  fortunes  by  taxation,  by  direct  prohibition  or  by  limita- 


686  Poverty  and  Progress  [§  259 

tiou  of  bcquosl  might  seriously  impair  the  spirit  uf  enterprise. 
Socialism,  which  would  abolish  private  control  of  production, 
would  in  the  present  condition  of  the  human  race  necessarily 
diminish  production.  Socialism  is  virtually  co-operation;  and 
the  true  co-operative  spirit  is  wofuUy  lacking  in  the  mass  of 
mankind.  There  are  indeed  conspicuous  examples  of  wealthy 
socialists,  but  they  have  been  for  the  most  part  men  of  lofty 
idealism  who  would  have  played  an  equally  prominent  part  in 
the  reform  rather  than  the  reconstruction  of  modern  industry. 
If  the  rank  and  file  of  men  were  ethically  as  advanced  as  are 
many  of  the  socialist  leaders,  there  would  be  no  need  of  reform. 
Socialism  assumes  that  mankind  is  ready  for  the  self-abnegation 
implied  in  the  very  idea  of  the  public  and  co-operative  activity 
which  is  to  include  the  whole  of  productive  enterprise.  History 
and  psychology  alike  teach  us  that  this  grossly  underrates  the 
importance  of  the  economic  motive.  When  the  world  is  ready 
for  socialism,  socialism  will  be  unnecessary.  In  the  mean  time 
any  serious  encroachment  of  socialism  would  inevitably  bring 
with  it  a  slackening  in  the  pace  of  accumulation;  and  in  the 
long  run  a  diminution  of  wealth  cannot  mean  a  diminution  of 
poverty. 

To  say,  however,  that  poverty  has  always  existed  is  no  reason 
for  believing  that  it  should  continue  forever  to  exist.  Absolute 
equality  of  conditions  is  indeed  an  iridescent  dream,  for  it  runs 
counter  to  the  inequality  or  differentiation  which  is  the  law  of 
all  life  and  the  explanation  of  all  change.  But  if  the  preceding 
discussions  in  this  volume  have  emphasized  any  one  point  it 
is  the  fact  of  the  progressive  intermingling  of  the  individual  and 
social  points  of  view,  —  the  interpenetration,  as  it  were,  of  the 
individual  by  the  claims  of  society,  and  on  the  other  hand  the 
infusion  into  the  collective  activity  of  some  of  the  surplus  energy 
which  must  always  continue  to  find  its  tap-root  in  the  efforts 
of  the  individual.  Translated  into  economic  terms,  this  means 
that  the  modern  industrial  system  is  slowly  producing  not  only 
political   democracy  but    economic   democracy,  and    that    eco- 


§  259I  Prevention  of  Poverty  687 

nomic  democracy  is  incompatible  with  permanent  and  wide- 
spread poverty. 

This  does  not  imply  that  economic  forces  alone  and  directly 
are  creating  a  millennium,  or  that  the  political  ideal  is  laissez- 
faire.  Government  and  the  public  sentiment  behind  it  are 
in  a  sense  the  outgrowth  of  the  economic  situation;  but,  as 
we  have  learned,  they  are  also  potent  factors  in  modifying  the 
situation.  Economic,  political  and  ethical  forces  are  conspiring 
to  bring  about  progress  by  raising  the  social  level.  In  ordinary 
business  life  this  means  the  gradual  but  clearly  discernible 
elevation  of  the  standard  of  commercial  morality.  So  far  as 
poverty  is  concerned  it  means  the  lifting  of  the  standard  of  life 
of  the  laborer  and  the  setting,  in  ideal  at  least,  of  an  irreducible 
minimum,  below  which  national  production  is  not  worth  having. 
Practically  this  process  assumes  the  varied  forms  of  trade-union 
activity,  of  education  of  the  unskilled,  of  factory  legislation,  of 
social  insurance,  of  workmen's  compensation,  of  improved 
housing,  of  trade  agreements,  of  control  of  monopoly  and  above 
all,  of  the  curtailment  of  special  privileges.  The  process  is  a 
slow  one,  because  it  is  an  arduous  task  to  make  the  successful 
and  self-satisfied  business  man  realize  that  the  true  ultimate 
interests  of  his  class  are  associated  with  the  increased  consump- 
tion that  can  come  only  from  the  higher  standard  of  life  of  the 
mass  of  the  producers.  It  is  in  the  last  instance  public  opinion 
alone  which  in  a  democracy  can  proteci  the  well-intentioned 
and  long-sighted  employer  from  the  unfair  competition  of  his 
unscrupulous  and  selfish  rivals. 

The  way,  therefore,  to  have  progress  without  poverty  is  not 
to  level  down  but  to  level  up;  to  do  nothing  which  will  pre- 
vent the  capable,  the  resourceful  and  the  daring  from  exerting 
their  skill  and  inventive  ingenuity;  but,  on  the  other  hand,  to 
keep  open  the  door  of  opportunity  for  all  and  to  throw  about 
the  mass  of  the  less  fortunate  and  the  less  gifted  the  protect- 
ing mantle  of  a  public  sentiment  which  will  be  intolerant  of 
injustice,  and  which  wiU  insist  upon  the  creation  of  conditions 


688  Poverty  and  Progress  [§260 

that  insure  to  every  worthy  human  being  at  least  the  possi- 
bility of  a  worthy  human  existence. 

260.   The  Future  of  Economic  Life 

We  come  finally  to  the  questions  which  at  the  close  of  such 
a  study  as  this  inevitably  force  themselves  upon  us:  Whither 
are  we  tending?  What  lessons  have  an  economic  interpretation 
of  the  past  and  of  the  present  to  teach  us  in  our  guidance  for 
the  future?  What  are  the  forces  that  are  making  for  progress 
or  retrogression? 

There  is  no  blinking  the  fact  that  many  give  a  pessimistic 
answer  to  these  queries:  they  call  attention  to  the  increase  of 
luxury  and  materialism;  they  look  with  suspicion  upon  what 
they  term  the  growing  plutocracy  and  the  new  feudalism; 
they  point  to  the  warning  example  of  the  oriental  monarchies, 
of  classic  Greece  and  Rome,  and  tell  us  that  in  our  case,  too, 
the  period  of  prosperity  which  is  now  upon  us  will  be  followed 
by  one  of  decay  and  final  dissolution.  What  has  been  will  be: 
there  is  nothing  new  in  human  affairs. 

Yet  a  discriminating  study  of  the  considerations  set  forth  in 
this  volume  should  preserve  us  from  so  gloomy  and  despondent 
an  attitude.  The  three  factors  of  importance  to  which  all 
that  has  preceded  may  be  reduced  are:  the  growth  of  industrial 
capital,  the  internationalism  of  science,  and  the  emergence 
of  the  democratic  ideal. 

(i)  In  ancient  Rome,  as  in  feudal  Europe  and  colonial 
America,  the  conditions  of  landholding  played  a  dominant 
role.  The  control  of  the  trade  routes  was  the  chief  factor  in 
the  rise  and  fall  of  the  oriental  monarchies,  of  the  Greek  city 
states,  of  the  Italian  and  German  towns,  of  Portugal  and 
Spain.  The  distinguishing  mark  of  modern  times,  on  the 
other  hand,  is  the  existence  of  industrial  capital.  We  speak 
glibly  of  the  recent  progress  of  science,  but  few  realize  the 
true  import  of  this  growing  subjection  of  nature  to  man,  and 
of  the  revolutionary  character  of  this  harnessing  of  the  powers 


§  26o]      The  Future  of  Economic  Life        689 

of  the  universe  to  the  yoke  of  the  human  intellect.  For  one 
thing,  it  has  made  possible  an  almost  hmitless  increase  in 
production.  Landed  capital,  under  the  unscientific  methods 
of  the  past,  was  able  to  go  so  far  and  no  farther.  The  advent 
of  commercial  capital  indeed  increased  prosperity,  and  to  the 
extent  that  exchange  is  really  a  phase  of  production,  augmented 
the  productive  power  of  the  world.  But  here,  again,  its  efficacy 
was  confined  within  narrow  bounds.  Creating  new  values 
simply  by  the  bartering  of  existing  values,  the  pyramid  of 
wealth  rested  on  the  basis  of  the  actual  production  within  each 
community,  and  could  not  be  piled  up  beyond  a  certain  height. 
But  with  modern  industrial  capital  and  the  snatching  from 
nature  of  her  intimate  secrets,  the  utilization  of  natural  re- 
sources within  each  country  has  become  almost  boundless, 
and  provides  an  ever-broadening  base  for  the  benefits  of  trade 
and  commerce. 

It  is  for  this  reason  alone  that  the  history  of  the  world  in 
the  future  is  to  be  so  different  from  the  past.  In  former  times, 
after  a  certain  point  had  been  reached  in  agriculture  and  com- 
merce, human  ingenuity  was  powerless  to  do  more  than  divide 
existing  wealth;  and  with  this  fixed  limit  to  production,  it  is 
no  wonder  that  each  civilization  in  turn  should  have  attempted 
to  secure  the  prize  for  itself.  Hence  the  rise,  the  glory  and 
the  decline  of  nations.  In  future,  however,  in  lieu  of  dividing 
existing  wealth,  each  nation  which  lives  up  to  its  opportunities 
will  be  able  to  create  new  wealth.  Important  as  will  continue 
to  be  the  land  question  and  the  trade  relations,  the  secret  of 
ultimate  success  is  to  be  sought  in  the  fundamental  conditions 
of  industrial  enterprise  at  home;  and  with  the  growth  and 
control  of  industrial  capital  there  need  be  no  limit  to  the  con- 
tinuous march  of  wealth  and  progress. 

(2)  Science  is  not  only  boundless  in  its  possibilities,  but  im- 
partial in  its  activities.  Science  transcends  all  national  lines. 
Never  again  will  a  country  be  able  to  achieve  or  to  retain  a 
monopoly  of  industrial  advantages.  For  the  time  being,  in- 
44 


690  Poverty  and  Progress  [§  260 

deed,  climatic  conditions  or  racial  characteristics  may  give 
one  nation  a  temporary  preponderance  in  some  particular  cat- 
egory of  production;  but  with  the  overwhelming  importance 
of  new  industrial  methods,  applicable  impartially  to  all  natural 
forces,  the  advantage  cannot  be  permanently  retained. 

We  are  accustomed  to  speak  of  the  changes  brought  about 
by  the  alteration  in  the  media  of  transportation  and  the  growth 
of  the  world  market;  we  do  not  yet  realize  the  full  implications 
of  the  industrial  revolution.  Rightly  conceived,  it  means  the 
coming  internationalism  of  mighty  empires  in  friendly  com- 
petition with  each  other,  not  for  the  division  of  what  exists, 
but  for  the  utilization  of  what  can  be  made  to  exist.  For  the 
immediate  future,  indeed,  while  nations  are  still  in  unequally 
developed  stages  of  industrial  growth,  and  while  there  remain 
extended  markets  not  yet  on  the  highroad  to  industrial  pre- 
dominance, there  will  still  be  some  room  for  the  nationalism 
of  the  old  type  with  its  protective  features  and  its  commercial 
rivalries.  In  these  contests  we  must  undoubtedly  take  our 
part.  But  with  every  decade's  progress  in  science  the  condi- 
tions will  change,  and  the  old  nationalism  of  exclusiveness  will 
melt  into  the  new  cosmopolitanism  based  upon  the  continual 
progress  of  each  great  and  economically  homogeneous  community. 

(3)  The  final  point  of  difference  —  the  flower  and  fruit  of 
all  its  forerunners  —  is  the  existence  of  the  democratic  ideal. 
We  point,  indeed,  with  complacency  to  the  advance  made  by 
the  skilled  members  of  the  working  class,  but  to  those  who 
realize  the  essential  conditions  of  successful  democracy,  where 
the  mass  of  citizens  are  necessarily  the  laborers,  the  ideal  to  be 
attained  advances  still  more  rapidly  than  the  actual  progress. 
The  brutish,  lethargic  peasant  of  the  old  world  is,  perhaps, 
content  with  his  crust  and  his  misery.  The  free  citizen  of 'the 
modern  industrial  state  wants,  and  wants  justly,  to  participate 
in  the  spiritual  as  well  as  the  material  benefits  of  modern  civil- 
ization. With  every  ^advance  in  his  economic  position,  due  to 
the  interplay  of  mode'rn  industrial  forces,  new  vistas  of  possi- 


§  26o]      The  Future  of  Economic  Life        691 

bilities  disclose  themselves,  new  sources  of  legitimate  satisfac- 
tion make  their  appearance.  The  social  unrest  of  to-day, 
with  all  its  disquieting  and  regrettable  incidents,  is  on  the 
whole  a  salutary  symptom.  It  is  but  the  labor  pains  in  the 
birth  of  the  new  industrial  order  which  has  been  in  the  making 
for  the  past  few  generations,  and  of  which  the  faint  outlines 
are  even  now  discernible. 

This  new  industrial  order  depends,  however,  on  the  emer- 
gence of  a  healthy  public  opinion.  In  antiquity  political  and 
social  opinion  was  a  class  opinion.  In  the  middle  ages  the 
incoherent  public  opinion  was  intolerant  to  competition.  In 
modern  times  the  progress  of  economic  thought  and  the  pres- 
sure of  economic  fact  in  uplifting  the  hitherto  submerged  classes 
of  the  community  are  generating  a  public  opinion  which  frankly 
recognizes  the  benefits  of  a  healthy  competition,  but  which 
insists  more  and  more  on  an  effective  social  control  of  compe- 
tition to  the  end  that  it  be  elevated  and  purified. 

A  study  of  the  economic  forces  now  at  work  therefore  jus- 
tifies a  reasonable  hopefulness.  The  productive  powers  of 
society  are  augmenting  at  such  a  prodigious  rate  that  we  need 
no  longer  apprehend  a  decay  of  general  prosperity  or  of  national 
power.  There  is  to  be  no  further  irruption  of  the  barbarian, 
because  there  will  soon  be  no  more  barbarians.  There  is  to  be 
no  swinging  back  of  the  pendulum  of  civilization,  because  under 
the  influence  of  the  new  economic  forces  only  those  nations 
can  succeed  that  understand  how  to  utilize  industrial  capital; 
and  this  comprehension  implies  an  ever-ascending  stage  of 
civilization.  There  is  to  be  no  domination  of  each  people  in 
turn  over  all  the  others,  because  of  the  internationalism  of 
science  and  the  impartial  territorial  diffusion  of  industrial 
agencies.  And  within  each  nation,  while  the  rich  are  un- 
doubtedly getting  richer  and  while  poverty  still  stalks  abroad, 
the  poor  are  not  getting  poorer.  The  creation  of  a  more  equa- 
ble, because  a  more  complete,  competition  through  the  develop- 
ment of  the  system  of  collective  bargaining  and  the  curtailment 


692  Poverty  and  Progress  [§  261 

of  all  special  privileges;  the  recognition  on  the  part  of  the 
public  that  lasting  prosperity  depends  not  only  on  the  con- 
servation and  free  play  of  capital,  but  also  on  the  gradual  ele- 
vation of  the  laborer  from  a  cheap  man  to  a  dear  man;  the 
coming  social  control  of  competition  itself  in  the  interests  of  a 
more  enlightened  and  hence  really  freer  rivalry,  —  all  these 
will  inevitably  tend  to  secure  to  each  class  in  the  community 
its  proper  share  in  the  national  dividend. 

261.   The  Role  of  Economics 

Economics,  then,  has  a  progressively  important  role  to  play 
in  the  future.  We  thus  come  at  the  end  to  the  position  from 
which  we  started  out.  With  the  commanding  significance  of 
the  economic  life  in  its  influence  on  social  progress,  econom- 
ics, in  pointing  out  exactly  what  is,  must  necessarily  concern 
itself  with  what  ought  to  be.  If  the  economic  student  is  the 
real  philosopher  of  social  life,  he  will  take  a  more  notable  part 
in  future  speculation  and  future  legislation.  The  various  social 
classes,  by  reason  of  their  very  being,  see  only  the  particular, 
not  the  general,  interests.  The  farmer  understands  the  work- 
ings of  Wall  Street,  and  the  factory  hand  comprehends  the 
condition  of  the  world  market,  as  little  as  the  capitalist  real- 
izes the  true  ideals  of  the  laborer.  To  let  any  one  class  act  as 
spokesman  for  the  other  is  pregnant  with  danger.  The  eco- 
nomic student,  if  he  is  worthy  of  his  calling,  will  proceed  with- 
out fear  or  favor;  he  will  be  tabooed  as  a  socialist  by  some, 
as  a  minion  of  capital  by  others,  as  a  dreamer  by  more.  But 
if  he  preserves  his  clearness  of  vision,  his  openness  of  mind, 
his  devotion  to  truth  and  his  sanity  of  judgment,  the  deference 
paid  to  his  views,  which  is  even  now  beginning  to  be  apparent, 
will  become  more  and  more  pronounced.  The  influence  of 
economic  conditions  on  economic  theory  has  been,  let  us  hope, 
abundantly  demonstrated;  but  the  reciprocal  influence  of 
economic  thought  on  actual  conditions  is  in  danger  of  being 
overlooked.     As   the   science   itself   becomes   more   and   more 


§  26i]  The  Role  of  Economics  693 

complete,  it  will  be  in  a  better  position  to  apprehend  and  to 
explain  the  real  content  of  existing  conditions  and  the  true 
method  of  making  the  actual  conform  to  the  ideal.  Economics, 
which  is  to-day  only  in  its  infancy,  and  which  is  of  all  disci- 
plines perhaps  the  most  difficult  and  the  most  complicated,  is 
indeed  interlaced  with  and  founded  upon  the  actual  condi- 
tions of  the  time;  but  like  natural  science  the  economics  of 
the  future  will  enable  us  to  comprehend  the  living  forces  at 
work,  and  by  so  doing  will  put  us  in  a  position  to  control  them 
and  to  mould  them  to  ever  higher  uses.  Economics  is  there- 
fore both  the  creature  and  the  creator.  It  is  the  creature  of 
the  past;  it  is  the  creator  of  the  future.  Correctly  conceived, 
adequately  outlined,  fearlessly  developed,  it  is  the  prop  of  ethi- 
cal upbuilding,  it  is  the  basis  of  social  progress. 


INDEX 


INDEX 


^BRASION,  472- 

Accidents,  laws  regarding,  647. 

Advances,  504,  509. 

Agricultural  stage  of  private  property, 
12S. 

Agricultural  credit.  Federal  Farm 
Loan  Act,  546*. 

Agriculture,  possibilities  of,  44,  45; 
in  early  period  of  American  eco- 
nomic life,  loi;  in  America  since 
the  Civil  War,  103-106;  extensive 
and  intensive,  308,  309,  315,  316; 
stages  in,  -313-316;  migrator>', 
313,  314;  surface  tillage,  314;  sta- 
tionary, 314;  alternating,  315; 
two-field  system,  315;  three-field 
system,  315;  open-field  or  inter- 
mixed system,  315;  convertible, 
315;  rotation  of  crops  or  diversified 
farming,  315;  enclosures,  315;  capi- 
talistic farming,  316;  in  the  United 
States,  316:  large-scale,  338-341; 
combination  eliminated  in,  350. 

Aldrich-Vreeland  Bill,  539. 

America,  early  period  of  economic  life 
of,  100-102;  growth  of  industry  in 
nineteenth  century  in,  102-104; 
recent  development  of  industr>^  in, 
104-106;  modern  problems  of,  106- 
108. 

American  system,  the,  102. 

Anarchism,  685. 

Annuities,  409,  410,  603,  604;  ton- 
tine, 604. 

Apprenticeship,  trade  union  restric- 
tion of,  167,  168,  436,  437. 

Arbitrage,  361. 

Arbitration,  446-448. 

Aristotle,  no,  138. 

Arnold,  Matthew,  203. 

Associated  and  corporate  enterprise, 
96-99. 

Auction  sale,  231,  232. 

Austria,  money  standard  in,  483. 


gAClEHOT,  WALTER,  512,  sn- 
Balance  of  bargain,  117. 

Balance  of  trade,  117,  549-552,  560. 

Bank  certificates,  500. 

Bank  drafts,  500. 

Bank  notes,  505;  steps  to  insure  safety 
of,  521-  525;  public  or  private  issue 
of,  521,  522;  right  of  issue  of,  523, 
524;  monopoly  of  issue  of,  523;  de- 
centralization of,  524;  character  of, 
524,  525;  denominations  of,  525; 
regulation  of,  525-528;  French, 
Swiss,  Dutch,  English,  and  German 
systems  of  issue  of,  527,  528;  Ameri- 
can systems,  528-533;  under  the 
Federal  Reserve  Act,  540,  541. 

Bank  of  England,  522,  523. 

Bank  of  France,  522. 

Bank  rate,  516-518. 

Bank  reserves,  511-518;  character  of, 
5 1 1-5 13;  single  and  multiple,  512; 
combined,  512;  composition  of,  513, 
514;  amount  of,  514-516;  protec- 
tion of,  516-518. 

Bank  restriction,  493. 

Banking,  Credit  and,  ch.  xx.x,  496- 
520;  development  of,  501-506; 
foreign  systems  of,  527,  528;  Amer- 
ican systems  of,  528-533;  general 
asset,  529;  Suffolk  system,  529; 
safety-fund  system,  530;  bond-de- 
posit system,  530. 

Banking  principle,  526. 

Banks,  origin  of,  97;  derivation  of 
word,  501;  money  dealings  of,  501, 
502;  credit  transactions  of,  502- 
506;  early,  502,  503;  private,  502- 
50s;  in  Venice,  502,  503,  509;  trans- 
fer, 503;  in  Amsterdam,  503,  504, 
509;  giro,  503;  savings,  503;  deposit, 
504;  loan,  504,  505;  of  discount, 
505;  of  issue,  505,  521-525;  first 
government,  505;  syndicate  and 
promoting  operations  of,  506;  state, 


697 


698 


Index 


522,  524,  532;  federal  reserve,  539- 
543;  national,  515,  524,  530-533; 
wild-cat  and  coon-box,  529;  Suf- 
folk, 529;  safety  fund,  530;  farm 
land,  546*. 

Barrator,  76. 

Barter,  68,  76,  87,  227-229. 

Basing  point  system,  592. 

Bequest,  right  of,  137. 

Billeter,  G.,  406. 

Bills,  foreign,  554;  documentary,  554; 
finance,  554. 

Bills  of  exchange,  499. 

Bimetallism,  68,  476,  479-483. 

Biology,  relation  of  economics  to,  30. 

Birth  rate,  57-59,  61. 

Blacklist,  440. 

Bodin,  116. 

Bond  deposit  system,  530. 

Bonds,  330,  331. 

Bonus  plan,  445. 

Booms,  361. 

Bottomry  loans,  602. 

Bounties,  629-631. 

Boycotts,  441-443. 

Brassage,  471. 

Biicher,  C,  90. 

Bucket-shops,  367. 

Business,  4,  85. 

Business  enterprise,  85-89. 

Buyers  and  sellers,  229-235. 

Buyer's  monopoly,  231. 

By-products,  254. 

QAIRNES,  J.  E.,  158,  465,  548. 
Call  loans,  397,  536-538. 

Canals,  575,  620. 

Capital,  ch.  xxi,  317-332;  and  income, 
15-19;  traditional  definition  of,  17; 
origin  of  term,  17;  as  capitalized 
income,  17,  18,  209,  404;  as  con- 
trasted with  income,  18;  chief 
function  of,  18;  measure  of  wealth, 
19,  21;  appearance  of,  on  a  large 
scale,  applied  in  industry,  81;  in 
classic  antiquity  and  in  modern 
times,  84;  combinations  of,  168; 
composed  of  pieces  of  capital,  215, 
216;  marginal  efficiency  of,  and  in- 
terest, 266,  267;  as  a  factor  of 
production,  283-285;  and  land, 
as  factors  of  production,  304- 
307;  consumption,  317;  lucrative  or 


acquisitive,  317;  production,  317; 
fixed  and  circulating,  318,  319; 
active  and  passive,  319;  agricul- 
tural, 319;  land  or  landed,  319; 
commercial,  319;  industrial,  319; 
financial,  319,  320;  productivity  of, 
320-326;  function  of,  320-325;  as 
basis  of  roundabout  production, 
320,  321;  creation  and  growth  of, 
323-326;  as  foundation  of  civiliza- 
tion, 323,  324;  as  available  stock  of 
wealth,  325;  nature  and  influence 
of,  326-329;  characterized  by  mass 
production,  uniformity,  and  inter- 
changeability,  327,  328;  investment 
of,  329-332;  concentration  of,  335; 
as  a  homogeneous  fund,  395-397; 
can  never  become  costless,  407- 
410;  monopoly  of,  and  wages,  428; 
reserve,  511;  industrial,  growth  of, 
688,  689. 

Capital  value,  17,  206-209,  211,  220- 
223,  399- 

Capitalist  economy,  81-84. 

Capitalists,  rise  of,  8x;  and  laborers, 
289. 

Capitalization,  of  rent,  218;  rate  of, 
220;  and  efficiency,  268,  269;  and 
trusts,  276;  and  crises,  545,  546. 

Capitalization  of  Value,  The,  ch.  xiv, 
204-222. 

Carey,  H.  C,  2S0,  561,  565. 

Cartel,  343. 

Cash  credits,  508. 

Cash-items,  513. 

Cash  reserves,  513. 

Cernuschi,  M.,  476. 

Certificates,  coin,  488;  gold,  489;  sil- 
ver, 489;  of  deposit,  500;  clearing 
house,  510,  512. 

Character  and  Factors  of  Production, 
ch.  xviii,  278-287. 

Charity,  individual,  682;  institutional, 
private,  682;  institutional,  public, 
683-685. 

Chattels,  127. 

Check  system,  500,  509,  510. 

Child  labor,  287,  643-646. 

Civilization,  15. 

Clan,  the,  85-87. 

Clark,  J.  B.,  124,  185. 

Clark's  law,  185-188. 

Class  competition,  143,  144. 


Index 


699 


Class  legislation,  566,  568. 

Classic  antiquity,  economic  theory  in, 
iog-ii2. 

Classification,  railway,  584-587. 

Clearing  house,  510,  511. 

Clearing  house  certificates,  510,  512. 

Climate,  effect  on  economic  life,  38- 
40;  the  altering  of,  43,  44. 

Clipping,  472. 

Closed  shop,  439. 

Coin,  in  early  middle  ages,  477;  gold 
and  silver,  477-483. 

Coinage,  619. 

Coinage  problems,  470-475. 

Combination,  152;  of  labor,  299-301; 
successive,  300;  simultaneous,  300; 
advantages  of,  345,  346;  causes  of, 
347;  growth  and  extent  of,  347- 
349;  limits  of,  349-351- 

Commerce,  46,  83. 

Commercial  economy,  77-81. 

Commercial  paper,  discount  of,  540. 

Commission  work,  94. 

Commodities,  the  term,  q,  10;  and 
services,  10;  speculation  in,  362; 
contrasted  with  laborers,  415,  416, 
422. 

Commodity  competition,  141,  142. 

Communication,  effect  of  improve- 
ments in,  48. 

Communism,  65,  128,  129,  136,  613, 
685. 

Comparative  costs,  law  of,  226, 
227. 

Comparative  marginal  utilities,  law 
of,  227. 

Competition,  ch.  x,  139-153;  68,  136, 
230,  234-238;  rise  of,  82;  nature 
of,  139-141;  group,  139,  140; 
relation  to  progress  141,  144, 
145;  forms  of,  141-145;  com- 
modity, 141,  142;  individual, 
142,  143;  market,  143;  class,  143, 
144;  race  or  national,  144,  145;  dan- 
gers of,  145-147;  brute  and  human, 
145-147;  cut-throat,  146,  147;  lim- 
its of,  147-150;  fair  and  unfair,  148; 
substitutes  for,  150-153;  sometimes 
harmful,  349;  hard  to  prevent,  350; 
unfair,  forms  of,  632,  633;  and 
trusts,  635,  636;  unfair,  prohibition 
of,  638-641;  between  railways,  579, 
580. 


Concentration,  of  .population,  52-54; 
meaning  of,  333-335;  kinds  of,  334, 
335;  of  labor,  335;  of  land,  335;  of 
capital,  335;  of  employment,  335. 

Concentration  of  Production,"  The, 
ch.  xxii,  333-351. 

Conciliation,  446-448. 

Consolidation,  341-345;  of  railways, 
579- 

Constant  returns  or  cost,  law  of,  253. 

Consumer's  rent,  195. 

Consumer's  surplus,  194,  195. 

Consumption,  freedom  of,  168,  169; 
relation  of  social  surplus  to,  201- 
203;  relation  of  production  to,  278- 
281,  286. 

Contract,  freedom  of,  169,  170. 

Control  of  Trusts,  The,  ch.  xxxvi, 
632-642. 

Co-operation,  140,  151,  152,  443-446. 

Co-operative  societies,  151,  446. 

Copyrights,  153,  369,  391. 

Corner,  361,  362. 

Corporate  and  associated  enterprise, 
96-99. 

Corporate  finance,  331. 

Corporation  problem,  98. 

Corporations,  97-99;  taxation  of,  269, 
270;  regulation  of,  273-275;  signifi- 
cance of,  329,  330;  holding,  344,  345. 

Cosmopolitanism,  theory  of,  1 18-120. 

Cost,  meaning  of,  189-192;  and  price, 
190;  as  equivalent  to  pain,  190,  191; 
individual  and  social,  192-194,  197, 
198;  marginal,  equivalence  with 
marginal  utihty,  192;  and  surplus, 
194-198;  depends  on  reciprocal  de- 
mand, 196;  social,  equivalence  with 
social  utility,  197,  198;  and  utility, 
198-201;  of  reproduction,  245,  246; 
equivalence  between  individual  and 
social,  246;  law  of  marginal  or 
maximum,  247-249;  marginal,  as 
determining  normal  price,  248-251; 
law  of  minimum,  249-251;  law  of 
varying,  251-253;  constant  and 
uniform,  251-253;  increasing,  law 
of,  252;  diminishing,  law  of,  253; 
joint,  law  of,  253-255;  of  replace- 
ment, 274;  of  labor,  289-291;  rela- 
tion to  wages,  289;  measured  by 
efficiency,  290,  291;  and  rent,  378- 
381;  and  wages,  416-418. 


JOO 


Index 


Cost  of  production,.  244-247;  relation 
to  normal  price,  245;  meaning  of, 
24s;  defined,  247;  relation  to  joint 
cost  and  individual  cost,  255;  and 
value,  in  privileges,  etc.,  262-264; 
and  price,  265,  266. 

Cost  theory,  of  wages,  417;  of  money, 
460,  461. 

Costs,  comparative,  law  of,  226, 
227. 

Cournot,  A.  A.,  30. 

Course  of  interest,  405-407. 

Crafts,  92. 

Credit,  450,  455;  becomes  integral 
part  of  production  and  exchange, 
82;  nature  and  forms  of,  496-501; 
commercial,  498-500;  industrial, 
500,  501 ;  agricultural,  500,  546* ; 
financial,  500,  501;  and  prices,  518- 
520;  and  crises,  543-546. 

Credit  and  Banking,  ch.  xxx,  496- 
520. 

Credit  and  Currency,  ch.  xxxi,  521- 
546. 

Credit  economy,  68. 

Credit  transactions  of  banks,  502-511. 

Crises  and  credit,  543-546. 

Cropping  system,  388. 

Currency,  Credit  and,  ch.  xxxi,  521- 
546. 

Currency  principle,  525,  526. 

Currency  question,  107. 

Custom,  150,  151. 

Custom  system,  91,  94. 

Customs  tariff,  557.  See  Tariff, 
Protection. 

J)ANBURY  HATTERS,  442,  443. 
Death  rate,  58-61. 

Debasement,  472,  473. 

Deductive  and  inductive  methods  in 
economic  investigation,  28,  29. 

Demand,  and  supply,  199,  223,  224, 
255.  256,  416;  reciprocal,  law  of, 
227;  normal,  241-244;  elasticity  of, 
241-244;  joint,  243,  244;  of  money, 
454-456. 

Demand  price,  238. 

Democracy,  686,  687. 

Democratic  ideal,  emergence  of,  688, 
690,  691. 

Demolins,  E.,  42.  ' 

Density  of  population,  49-52. 


Department  stores,  651. 

Deposits,    502-504,    507,    508;    and 

checks,  509,  510;  importance  of,  in 

England  and  United  States,  510. 
Depreciation,  law  of,  206-209,  211. 
Determination  of  Market  Value,  ch. 

XV,  222-240. 
Determination  of  Normal  Value,  ch. 

xvi,  241-261. 
Development,  economic,  of  the  United 

States,  100-108. 
Development  of  Economic  Thought, 

ch.  viii,  109-124. 
Deviation,  472. 

Differential,  value  as  a,  217-220. 
Differential  rates,  589-593. 
Diminishing  cost,  law  of,  253. 
Diminishing  returns,  law  of,  63,  212- 

214,  252,  306,  308,  310,  346,  375, 

402,  419. 
Diminishing  time  and  space  utility, 

laws  of,  210. 
Diminishing  utility,  law  of,  175-179, 

212-214. 
Discommodity,  191. 
Discount,  505-507. 
Discount  of  commercial  paper,  under 

the  Federal  Reserve  Act,  540. 
Discount  rate,  516,  517. 
Discounting  of  future,  210. 
Discrimination,      railway,      587-593; 

personal,  587-5S9;  local,  587,  589- 

593- 
Distribution,  classical  theory  of,  in; 

theory  of,  118,  120,  121;  shares  in, 

352-354;    relation    to    production, 

353- 

Distribution  of  population,  50,  52, 
54-56,  57. 

Disutility,  190-192;  marginal,  192. 

Division  of  labor,  nature  and  advan- 
tages of,  293-298;  social,  293-295; 
industrial,  295;  technical,  295-297; 
territorial,  297,  298;  defects  of,  298, 
299. 

Divorce,  freedom  of,  165,  166. 

Documentary  bills,  554. 

Domestic  system,  93,  94,  96. 

Double  standard,  476. 

Drafts,  499,  500. 

Dumping,  255. 

Dutch-auction  system,  232. 

Dynamic  normal  value,  225. 


Index 


701 


gCONOMIC  action,  12;  liberty  of, 
163-165. 

Economic  activity,  primitive,  85-87. 

Economic  conditions,  influence  on 
density  of  population,  51. 

Economic  development,  67-69. 

Economic  Development  of  the  United 
States,  ch.  vii,  100-108. 

Economic  freedom,  iig,  120,  155, 
163-170. 

Economic  investigation,  methods  of, 
28,  29. 

Economic  law,  meaning  of,  24-28. 

Economic  Law  and  Method,  ch.  ii, 
24-36. 

Economic  life,  3-6,  14;  effect  of  chmate 
on,  38-40;  of  geological  formation, 
40;  of  flora,  41;  of  fauna,  41;  of 
geographical  location,  42,  43;  the 
future  of,  688-692. 

Economic  man,  5. 

Economic  margin,  177,  178. 

Economic  motive,  4,  5. 

Economic  progress,  18;  bearing  of 
Malthus's  doctrine  on,  62;  classi- 
fication of,  74. 

Economic  science,  as  opposed  to 
economic  art,  36. 

Economic  Stages,  The,  ch.  v,  67-84. 

Economic  theory,  in  classic  antiquity, 
109-112;  mediaeval,  11 2-1 15;  mer- 
cantile doctrine,  116-118;  Ada,m 
Smith  and  the  Physiocrats,  118- 
121;  Ricardo  and  modern  econom- 
ics, 1 21-124. 

Economic  thought,  development  of, 
109-124. 

Economic  value,  174. 

Economics,  definition  of,  4,  7,  8,  13, 
14,  35;  a  social  science,  6,  7,  179; 
origin  of  term,  8;  often  called  science 
of  wealth,  8;  the  true  scope  of,  23; 
relation  to  other  sciences,  29-35; 
to  psychology,  30;  to  biology,  30; 
to  mathematics,  30,  31;  to  statis- 
tics, 31;  to  politics,  31,  32;  to  juris- 
prudence, 32,  33;  to  ethics,  33-35; 
scope  of,  35,  36;  pure  and  applied, 
35,  36;  the  role  of,  692,  693. 

Economy,  barter,  money,  and  credit, 
68;  animal,  vegetable,  and  mineral, 
68;  self-sufficing  or  isolated,  75-77; 
trade  or  commercial,   77-81;  local 


or  village,  78;  capitalist  or  indus- 
trial, 81-84;  national,  82,  83;  inter- 
national, 83. 

Edgeworth,  F.  Y.,  469. 

Education,  factor  in  eiSciency,  292. 

Efficiency,  and  value,  265-268;  the 
measure  of  cost,  290,  291;  of  labor, 
292,  293;  of  combination,  345-349; 
and  wages,  418-421. 

Egypt,  money  standard  in,  4S2. 

Eight-Iiour  laws,  597. 

Elasticity,  of  demand,  241-244;  of 
supply,  251-253. 

Electric  lighting,  624,  625. 

Emigration,  60,  61,  166. 

Eminent  domain,  136. 

Employers  and  workmen,  289. 

Employers'  liability,  657,  658. 

Employment,  concentration  of,  335; 
margin  of,  403,  404;  of  women  and 
children,  643-646. 

Enclosures,  315. 

England,  money  standard  in,  478,  479; 
railways  in,  594. 

Enterprise,  ch.  xxii,  333-351;  the 
term,  85;  associated  and  cor- 
porate, 96-99;  carried  on  by 
individuals,  96,  97 ;  by  partnerships, 
97;  by  trusts,  97-99;  quasi-public, 
149,  150;  freedom  of,  169,  170;  as  a 
factor  of  production,  284,  285;  a 
species  of  labor,  284;  meaning  of, 
333- 

Entrepreneur,  85,  300. 

Environment,  natural,  37-48;  change 
of,  43-48. 

Equality,  148,  149,  163,  164,  170. 

Essartage,  314,  316. 

Ethics,  6;  relation  of  economics  to, 
33-35- 

Exchange,  relation  to  wealth  and 
value,  13;  process  of,  76;  in  mediae- 
val economics,  11 2-1 15;  value  in, 
182-184;  ratio  of,  184;  conditions 
of,  226,  227;  law  of,  227;  rate  of, 
227-235;  money  as  medium  of,  449- 
451,  454-456;  rate  of  international 
552-556;  three-cornered,  552;  at 
p;ir,  553. 

Exchanges,  stock  and  produce,  363- 
368. 

Exchequer  notes,  490. 

E.xogamy,  87. 


702 


Index 


Expenses,  constant  and  variable,  ass- 
Exports,  balance  of,  over  imports,  117; 

from  the  United  States,  104,   105; 

relation  to  imports,  548-552. 

pACTORY  laws,  644-648. 

Factory  system,  94-Q6,  327,  328, 
336,  337.  627,  628. 

Family,  the,  87-90,  96;  matriarchal, 
86;  patriarchal,  88. 

Fauna,  effect  on  economic  life,  41,  46. 

Federal  Child  Labor  Act,  645. 

Federal  Farm  Loan  Act,  546*. 

Federal  Reserve  Act  of  1913,  538-543. 

Fees,  215. 

Feudalism,  130. 

Finance  bills,  554. 

Fire,  laws  regarding,  647. 

Fisher,  Irving,  469. 

Flora,  effect  on  economic  life,  41 ;  the 
altering' of,  45,  46. 

Food,  and  population,  in  Malthus's 
doctrine,  62-66. 

Forbearance,  marginal,  as  determin- 
ing the  rate  of  interest,  398-401. 

France,  money  standard  in,  478-481. 

Fraternity,  165. 

Free  coinage  of  silver,  470,  480-483. 

Freedom,  ch.  xi,  154-172;  econo- 
mic,     iig,      120,     155,     163-170; 

,  bodily,  155;  with  equality  and 
responsibility,  163-165,  170;  of 
marriage  and  divorce,  165,  166; 
of  movement,  166,  167;  of  occupa- 
tion, 167,  168;  of  association,  168; 
of  consumption,  168,  169;  of  pro- 
duction, 169,  170;  of  trade,  170; 
individual,  as  a  social  concept, 
171,  172. 

Free  Trade,  and  Mercantilists,  117, 
118;  corollary  of  Ricardian  doctrine, 
123;  when  harmful,  170;  growth  of, 
556-560;  meaning  of,  556,  557;  on 
exports,  557;  in  Great  Britain, 
559;  arguments  for,  566,  567; 
arguments  opposed  to,  560-565; 
criticism  of  arguments,  567-571. 

Freight  rates,  577,  586-593- 

Fundamental  concepts,  ch.  i,  3-23. 

Future,  discounting  of,  210. 

Future  estimates,  law  of,  209-211. 

Futures,  in  commodity  market,  363, 
365- 


Q.AIN  sharing,  444,  445. 
Gas  works,  624-626. 

General  asset  banking,  529. 

General  Law  of  Value,  The,  ch.  xvii, 
262-277. 

Gens,  the,  86. 

Geographical  location,  effect  on  eco- 
nomic life,  42,  43. 

Geological  formation,  effect  on  eco- 
nomic Hfe,  40;  changes  in,  46- 
48. 

Germany,  money  standard  in,  480; 
banks  of  issue  in,  523,  524. 

Ghent  system,  667. 

Gold,  relation  of  prices  to  supply  of, 
460,  464-469;  new  sources  of  supply, 
475;  and  silver,  changing  relations 
of,  476-483. 

Gold  certificates,  489. 

Gold  standard,  evolution  of,  477- 
488;  in  England,  478,  479;  in 
Portugal,  480;  in  Germany  ,  480; 
in  Scandinavia,  480;  in  Latin 
Union,  480,  481;  in  Netherlands, 
482;  in  Egypt,  482;  in  other  coun- 
tries, 483;  in  the  United  States,  483; 
in  Mexico,  486;  ways  of  adopting, 
487. 

Good-fellowship  system,  445. 

Good-will,  264. 

Goods,  the  term,  9,  10;  free,  11;  eco- 
nomic, 1 1 ;  indirect  or  instrumental 
or  production,  212,  278;  consump- 
tion, 212;  complementary,  243; 
non-reproducible,  262,  265;  con- 
sumers', 278;  producers',  278. 

Gossen,  H.  H.,  30. 

Government  and  Wealth,  ch.  xxxv, 
612-631. 

Government  ownership,  conditions  of, 
615,  616;  fiscal  and  social  monop- 
olies, 616;  classes  of,  617,  618; 
development  of,  6i8,  619;  condi- 
tions of,  619-623. 

Government  regulation,  627-629. 

Government,  purpose  of,  612,  613. 

Gratuitous  coinage,  470,  471. 

Greece,  ancient,  economics  of,  iio- 
112. 

Green,  T.  PL,  163. 

Greenbacks,  492-494. 

Gresham's  law,  473-475. 

Guilds,  92. 


Ind 


ex 


703 


PJALES,    116. 

Hamilton,  Alexander,  564. 
Handicraft  system,  9i-g3,  96. 
Help  system,  90,  91,  96. 
Hire,  205. 

Hire  system,  go,  91. 
Historical  Forms  of  Business  Enter- 
prise, The,  ch.  vi,  85-99. 
Historical  law,  27. 
Holding  corporation,  344,  345. 
Home  market,  561. 
Hours  of  labor,  regulation  of,  648-650. 

IMMIGRATION,  60,  61,  166,  167. 
Imports,  balance  of  exports  over, 
117;  relation  to  exports,  548-552. 

Income,  and  capital,  15-19;  pleasure 
or  benefit,  and  money,  16,  19;  capi- 
talized, 17;  fundamental  test  of 
wealth,  19,  21,  22;  taxable,  19; 
measure  of  wealth,  19,  21. 

Income  tax,  19. 

Increasing  cost,  law  of,  252. 

Increasing  returns,  law  of,  253. 

Increment,  marginal,  178;  and  value, 
185-188. 

Independent  Treasury  System,  538. 

Index  number,  461-464. 

India,  money  standard  in,  484,  485. 

Indifference,  margin  of,  403-405. 

Individual,  enterprises  carried  on  by 
96,  97. 

Individual  and  social  cost,  192-194. 

Individual  and  social  value,  179-182. 

Individual  competition,  142,  143. 

Individualism,  39,  614. 

Inductive  and  deductive  methods  in 
economic  investigation,  28,  29. 

Industrial  economy,  81-84. 

Industrial  Revolution,  the,  95. 

Industry,  growth  of  American,  in  the 
nineteenth  century,  102-104;  recent 
development  of  American,  104-106; 
standardization  of,  434,  435. 

Infant  industry,  563-565. 

Inheritance,  right  of,  137. 

Inheritance  taxes,  137. 

Injunctions,  438,  439. 

Insurance,  ch.  xxxiv,  598-611;  nature 
of,  598-601;  growth  of,  601-606; 
origin  of,  601-603;  in  antiquity, 
602;  marine,  602-605;  life,  603- 
605;    other    forms    of,    605,     606; 


theory  of,  606-609;  productivity 
of,  606,  607;  compared  with  trans- 
portation, 607 ;  primary  function  of, 
607-609;  self,  608;  methods  of ,  609, 
610;  policies,  kinds  of,  610;  regula- 
tion of,  611;  social,  reasons  for,  and 
forms  of,  655-657;  accident,  657- 
660;  sickness,  660,  661;  old  age, 
662-664;  invalidity,  664,  665;  un- 
employment, 664-668. 

Integration,  341-345. 

Intelligence,  transmission  of,  572-574. 

Interest,  ch.  xxv,  394-412;  classical 
theory  of,  in;  mediaeval  theory 
of,  114,  115;  relation  to  rent,  216; 
contrasted  with  wages  and  rent, 
217;  as  a  discount  of  the  future, 
219;  meaning  of  term,  219;  rate 
of,  220,  396,  397,  533,  534;  and 
efficiency,  266,  267;  contrasted 
with  profits,  357;  nature  of,  394- 
397;  loan  or  contract,  394,  395; 
natural  or  economic,  395;  on  call 
loans,  397;  and  forbearance,  398- 
401;  and  productivity,  401-404;  the 
measure  of  marginal  productivity  or 
forbearance,  404;  tendency  of,  to 
a  minimum,  407-410;  regulation 
of,  410-412;  contrasted  with 
wages,  413,   414. 

International  exchange,  rate  of,  552- 
556. 

International  trade,  ch.  xxxii,  547- 
571;   basis  of,  547-552. 

Internationalism  of  science,  689,  690. 

Interstate  Commerce  Commission, 
5Q5-S97.  641. 

Interstate  Commerce  Law,  588,  592, 
595- 

Inutility,  191. 

Inventions,  82,  94. 

Investigation,  economic,  methods  of, 
28,  29. 

Investment  and  valuation,  275-277. 

Investment  of  capital,  329-332. 

Irrigation,  43,  134. 

Isolated  economy,  75-77. 

Issue,  505,  508,  509;  banks  of,  505, 
521-525;  monopoly  of,  523;  de- 
centralization of,  524;  of  notes, 
under  the  Federal  Reserve  Act,  540, 
541- 

Itinerant  workmen,  90. 


704 

JAPAN,  1 
•J    Jevons, 


Index 


money  standard  in,  483. 
W.  S.,  30,  123,  191,   198, 


199- 


Joint  cost,  law  of,  253-255,  582-584. 
Joint-stock   principle,   beginnings   of, 

97- 
Jurisprudence,  6;  relation  of  econom- 
ics to,  32,  ss- 

J^ING,  GREGORY,  457. 
Kjnley,   D.,  469. 

LABOR,  ch.  xix,  288-303;    free,  68; 
combinations  of,    168;    marginal 
efficiency  of,  and  wages,  266,  267;  as 
a  factor  of  production,  283-285;  en- 
terprise a  species  of,  284;  meaning  of, 
288,  289;  physical  and  mental,  288 
real  value  of,  289;   cost  of,  289-291 
efficiency  of,  292,  293;    division  of 
nature  and  advantages  of,  293-298 
defects  of    division    of,    298,    299 
combination  of,  299-301 ;  supply  of 
301-303;  seasonal  demand  of,  302 
concentration  of,  335;  distinguished 
from  other  commodities,  415,  416, 
422;  monopoly    of,   427,   428;    or- 
ganizations,    432-437;     standardi- 
zation of,  434,   435;   lump-of-labor 
doctrine,  436;  strikes,  437-440;  boy- 
cotts, 440-443;   profit  sharing,  443- 
446;    arbitration    and    coociliatton, 
446-448;   hours   of,   regulation    of, 
648-650;   Sunday,  648,  649. 

Labor  Legislation,  ch.  xxxvii,  643-654. 

Labor  Problem,  The,  ch.  xxvii,  432- 
448. 

Labor  theory  of  private  property,  132, 
133- 

Laborers,  and  capitalists,  289;  con- 
trasted with  commodities,  415,  416, 
422. 

Laissez  Jaire,  123,  169,  613. 

Land,  ch.  xx,  304-316;  imder  the 
feudal  system,  15;  in  the  American 
colonies,  15,  16;  property  in,  growth 
of,  128-131;  theories  of  rights  to, 
131-134;  content  of  rights  in,  136- 
138;  and  slavery,  157-163;  as  a 
factor  of  production,  283-285; 
304-307;  extension  of,  305,  308; 
fertility  of,  308-311;  agricultural 
308,   309;     timber,   309;     grazing. 


309;  mineral,  310;  urban,  310,  311; 
situation  or  geographical  location 
of,  311-313;  cultivation  of,  313- 
316;    concentration  of,  335. 

Land  banks,  546*. 

Land  rent,  353;  one  of  many  kinds  of 
rent,  373-375;  relation  of,  to  other 
rents,  375-378;  and  price,  378-381; 
growth  of,  381-385;  justification  of, 
389-393- 

Land  tenure,  385-389. 

Latin  Union,  the,  480,  481. 

Law,  economic,  meaning  of,  24-28; 
various  meanings  of,  24,  25;  scien- 
tific, 25;  natural,  25-27;  historical, 
27;  of  population,  62-66. 

Legal  theory  of  private  ownership, 
133- 

Letter  of  credit,  500. 

Level  of  prices,  international,  54S. 
See  Price  level. 

Limited  liability,  97,  98. 

List,  Friedrich,  564. 

Lloyd'.s,  603. 

Loan  Associations,  546  *. 

Loans,  396,  411;  call,  397;  and  dis- 
counts, 507. 

Local  economy,  78. 

Location,  geographical,  effect  on 
economic  life,  40;  changes  in, 
4M8. 

Lombard  business,  504. 

Lotteries,  617. 

Luxury,  670-674. 

]yjACHINE   system,  327. 

Machinery,  invention  of,  82,  94; 
saving  of  cost  due  to,  296,  297; 
relation  to  demand  for  labor,  302; 
saving  of  time  due  to,  321,  322; 
farm,  338-341. 

Maine,  Sir  Henry,  68. 

Malthus,  62-66. 

Manufacturer,  the,  94,  95,  loi,  121, 
122. 

Manufactures  in  the  LTnited  States, 
103-106. 

Margin,  economic,  177,  178;  specu- 
lating on,  364;  of  indifference,  403- 
405;    of  employment,  403,  404. 

Marginal  cost,  192,  200;  law  of,  247- 
249. 

Marginal  disutility,  102. 


Ind 


ex 


705 


Marginal  efficiency,  264-268. 

Marginal  increments  of  wealth  and 
value,  185-188. 

Marginal  utilities,  comparative,  law 
of,  227. 

Marginal  utility,  175-179,  185-188, 
199,  213. 

Marginal  utilization,  213,  214. 

Market,  224;  and  normal  price,  224, 
225;   cornering,  361,  362. 

Market  competition,  143. 

Markets,  public  and  private,  619,  620. 

Marriage,  group,  86;  outside  of 
clan,  86,  87;  by  capture,  88;  free- 
dom of,  165,  166. 

Marriage  rate,  56-58. 

Marshall,  A.,  30,  124. 

Mar.x,  Karl,  124,  371. 

Mathematics,  relation  of  economics  to, 
30,  31- 

Matriarchate,  85. 

Maximum  or  marginal  cost,  law  of, 
247-249. 

Meaning  of  Value,  The,  ch.  xii,  173- 
188. 

Measure  of  Value,  The,  ch.  xiii,  189- 
203. 

Measure  of  wealth,  15-19. 

Mediaeval  economic  theor\%  112-115. 

Mercantile  doctrine,  the,  116-118. 

Mercantile  system,  558. 

Mercantilists,  the,  117,  118. 

Metayer  plan,  387,  444. 

Methods  of  economic  investigation, 
28,  29. 

Mexico,  money  standard  in,  486. 

Migration  of  population,  60,  61,  166. 

Mill,  J.  S.,  27,  52s;   548,  564. 

Minimum  cost,  law  of,  249-251. 

Minimum  living  wage,  677,  678. 

Minimum  wage,  650-654. 

Mint-charge,  471. 

Mobilization  of  credit,  541,  542. 

Money,  Nature  and  Value,  ch.  xxviii, 
449-469;  Practical  Problems,  ch. 
xxix,  470-495;  contrasted  with 
wealth,  19,  20;  classical  theory  of, 
112;  mediaeval  theory  of,  115;  later 
theories  of,  116,  117;  origin  and 
functions  of,  449-453;  a  medium  of 
exchange,  449-451,  454-456;  a 
standard  of  deferred  payments,  450; 
a  store  of  value,  450;   a  reserve  for 


credit  operations,  450;  actual  and 
ideal,  45 1 ;  metallic,  45 1 ;  paper,  45 1 , 
452,  488-495;  representative,  451, 
488,  489;  fiat,  451,  452,  490-495. 
fiduciary,  452,  488;  standard  ,  452; 
token  or  subsidiary,  452,  481,  485, 
486,  491;  value  of,  453-458;  supply 
and  demand  of,  454-458;  general  law 
of,  456,  457,  459;  quantity  theorj' 
of,  458-460;  cost  theory  of,  460, 
461;  and  price  level,  461-469;  dis- 
tribution and  stabiUty  of,  464-469, 
coinage  problems,  470-475;  seign- 
iorage on,  470-472;  debasement  of, 
472,  473;  Gresham's  law,  473-475; 
the  choice  of  the  standard,  475-479; 
bimetalhsm,  479-483;  credit,  488; 
soft  and  hard,  491;  bank  and  gov- 
ernment, 494,  495;  lawful,  513; 
coinage  of,  619. 

Money  economy,  68. 

Money  interest,  the,  122. 

Money  rate,  517,  533-538. 

Monogamy,  88. 

Monometallism,  68. 

Monopolies,  kinds  of,  152,  153;  regu- 
lators of  competition,  152,  153; 
fiscal,  616,  617;  social,  617,  618; 
municipal,  623-626. 

Monopoly,  230-234,  236-239,  334; 
buyer's,  231;  of  labor,  427,  428; 
of  capital  and  wages,  428;  of  issue, 
523;  railways  tend  toward,  578- 
580;    government,  616. 

Monopoly  of  value,  normal,  258-261. 

Monopoly  profits,  368,  369. 

Montchretien,  117. 

Multiple  standard,  469. 

Mun,  Thomas,  117. 

Municipal  monopolies,  623-626. 

RATIONAL     bank    system,   530- 

533- 
National  competition,  144,  145. 
Natural   Environment,   The,    ch.    iii, 

37-48. 
Natural  law,  25-27,  119,  132. 
Natural    rights    theory    of    private 

property,  132. 
Nature,  132. 
Netherlands,     money     standard     in, 

482. 
Normal  and  market  price,  224,  225. 

45 


7o6 


Index 


Normal  demand,  241-244;  and  nor- 
mal supply,  equilibrium  of,  255,  256. 

Normal  monopoly  value,  258-261. 

Normal  supply,  244-247;  and  normal 
demand,  equilibrium  of,  255,  256. 

Normal  value,  determination  of,  241- 
261. 

Norman,  George  W.,  525. 

Notes.    See  Bank  Notes. 

QBJECTIVE  value,  182,  183. 

Occupation     theory     of     private 

property,  131,  132. 
Occupational  disease,  647. 
Open  shop,  439. 
Oriental    nations,    economic    theory 

among,  109,  no. 
Over-capitalization,  276,  277,  546. 
Over-population,  62-66. 
Overproduction,  544-546. 

PANICS,   543-546. 

Paper  money,  488-495. 

Parcels  post,  573,  574,  621. 

Partnership,  97. 

Patents,  153,  369,  391. 

Patriarchal  family,  87-90. 

Pensions,  widows',  663;  orphans', 
663;  mothers',  663,  664. 

Philippines,  money  standard  in,  485, 
4S6. 

Phratries,  87. 

Physiocrats,  27,  118-121,  280;  566. 

Picketing,  438. 

Political  economy,  definition  of,  4; 
origin  of  term,  6,  7;  term  when  to 
be  used,  7,  8. 

Politics,  6;  relation  of  economics  to, 
31,  32. 

Polygamy,  88. 

Pools,  99,  342,  343,  345,  350. 

Poor  Law  System,  683,  684. 

Population,  The,  ch.  iv,  49-66;  density 
of,  49-52;  status  of,  49,  50;  density 
of,  50-52;  distribution  of,  50,  52, 
54~S7;  concentration  of,  52-54;  in- 
crease of  56-66;  migration  of,  61; 
the  law  of  62-66;  the  problem  of, 
65,  66. 

Portugal,  money  standard  in,  480. 

Post-ofEce,  the,  572-574,  620. 

Poverty,  the  facts  of,  674-678;  the 
causes  of,   678-681;    the  rehef  of. 


682-685;  the  prevention  of,  685- 
688. 

Poverty  and  Progress,  ch.  xxxix,  669- 
693- 

Power,  transmission  of,  47. 

Power  loom,  94. 

Practice  and  theory,  28. 

Premium  payment  system,  445. 

Price,  classical  theory  of,  112;  medi- 
aeval theory  of,  113,  114;  just  or 
natural,  113;  customary,  113,  151; 
and  competition,  142,  235-238;  and 
value,  184,  185;  means  money 
value,  184;  and  cost,  190;  market 
and  normal,  224,  225;  natural,  225; 
and  monopoly,  236-238;  demand, 
238,  239;  supply,  238,  239;  mar- 
ginal, 238,  239;  and  elasticity 
and  inelasticity  of  demand,  241- 
244;  relation  to  cost  of  production, 
245,  246;  normal,  as  determined 
by  marginal  cost,  248-251;  and 
joint  cost,  254;  normal  influence 
of,  upon  market  price,  256,  257; 
monopoly,  by  what  regulated,  258- 
261;  and  rent,  378-381. 

Price  agreements,  341-343,  345- 

Price  level,  dififerences  in,  461;  and 
index  number,  461-464;  changes  in, 
462,  464-466;  equilibrium  of,  466- 
468;  and  money  rate,  534-536; 
international,  548. 

Prices,  revolution  in,  116;  rise  and 
fall  of,  185;  contrasted  with  wages, 
rents,  and  interest,  217;  and  cost 
of  production,  265,  266;  and  mar- 
ginal efliciency,  268;  contrasted 
with  wages,  413,  415;  relation  of,  to 
supply  of  money,  459-461,  464-469; 
retail  and  wholesale,  462,  463;  revo- 
lution of,  468,  477;  fluctuations  of, 
468,  469;  and  credit,  518-520;  re- 
lation of  trusts  to,  637;  the  fixing  of, 
641. 

Primitive  economic  activity,  85-87. 

Primitive  technique,  69-72. 

Private  Property,  ch.  ix,  125-138;  119; 
origin  of,  26,  125-128;  theories  of, 
131-134;  limits  of,  134-136. 

Privileges,  263-265. 

Produce  exchange,  363-368. 

Producer's  surplus,  194. 

Product  sharing,  443,  445. 


Index 


707 


Production,  consumption  the  end  of, 
18;  of  the  United  States,  104-106; 
classical  theory  of,  1 10,  in;  freedom 
of,  169,  170;  relation  of  social  sur- 
plus to,  201-203;  cost  of,  244-247; 
its  meaning  and  relation  to  con- 
sumption, 278-281,  286;  kinds  of, 
281-283;  factors  of,  283-285,  304- 
307;  and  the  producer,  285-287; 
mass  327;  uniformity  of,  327,  328; 
interchangeability  of,  328;  con- 
centration and  monopoly  of,  334; 
large-scale,  335-338;  consoHda- 
tion  and  integration  of,  341-345; 
combination  and  etBciency,  345- 
340;  relation  to  distribution,  353. 

Productivity  and  interest,  401-404. 

Profit  sharing,  443-446. 

Profits,  ch.  xxiii,  352-372;  Ricardo's 
theory  of,  123;  definition  of,  353, 
354;  ordinary,  354-358;  nature  of, 
354;  normal,  354;  are  a  surplus, 
354>  371;  a^re  unstable,  356;  con- 
trasted with  interest,  357;  a  result 
of  price,  358;  aleatory  or  chance, 
358-360;  contrasted  with  wages, 
358;  industrial  and  pecuniary,  359; 
speculative,  360-368;  monopoly, 
368,  369;  regulation  and  justifica- 
tion of,  370-372;  analogy  between 
rent  and,  376-378;  relation  to 
wages,  429-431. 

Progress  and  social  surplus,  201- 
203. 

Progressive  wage  system,  445. 

Promissory  notes,  498,  499. 

Property,  contrasted  with  wealth,  20, 
21;  advance  from  common  to  pri- 
vate, 68;  in  land,  growth  of,  128- 
131- 

Property  rights,  content  of,  136-138. 

Protection,  rise  of,  557,  558;  factors 
of,  558;  in  Great  Britain,  558,  559; 
in  Germany  and  Italy,  559;  in  the 
United  States,  559,  560,  570,  571; 
arguments  for,  560-565;  arguments 
opposed  to,  566,  567;  criticism  of 
arguments,  567-571. 

Protective  tariff,  102,  149,  170.  See 
Protective  tariff. 

Psychology,  relation  of  economics  to, 

so- 
Public  opinion,  691. 


Public    ownership,    development    of, 

615-619;   conditions  of,  619-623. 
Public  utilities,  623-626. 
Pyx,  472. 

QUANTITY       theory,    of    money, 

^-  458-460. 

Quasi-public  enterprises,  149,  150. 

Quasi-rents,  218. 

Quesney,  120. 

J^ACE   competition,  144  145. 
Race  suicide,  66. 

Railway  problem,  149,  150. 

Railway  rebates,  640,  641. 

Railways,  103;  after  1830,  94;  esti- 
mate of  value  of,  273-275;  flotation 
of  securities  of,  275,  276;  develop- 
ment of,  575-577;  in  the  United 
States,  575;  in  Europe,  575;  cost  of, 
575;  mileage,  575,  576;  nature  of 
business,  577-580;  a  quasi-pubhc 
institution,  577,  578;  rates  and 
fares,  577,  578;  tend  to  become 
monopoly,  578-580;  expenses  of, 
580;  principle  of  charges,  581-584; 
classification,  584-587;  discrimi- 
nation, 584,587-593;  regulation  of, 
593-597;  government  ownership 
of,  593,  594;  governmental  su- 
pervision of,  594-597;  arguments 
against  government  ownership  of, 
622,  623;  street,  624-626. 

Rate,  money,  517,  533-538. 

Rate  of  exchange,  227-235. 

Rate  of  international  exchange,  552- 
5S6. 

Ratio  of  exchange,  184. 

Raymond,  Daniel,  564. 

Reciprocal  demand,  law  of,  227. 

Reference  rate  system,  445. 

Regulation,  and  valuation,  273-275. 

Relations,  263,  265. 

Remedy,  472. 

Remittances,  502,  509. 

Remnant,  203. 

Rent,  ch.  xxiv,  373-393;  consumer's, 
195;  relation  of  interest  to,  215,  216; 
contrasted  with  wages,  prices,  and 
interest,  217,  219;  definition  of,  217; 
how  measured,  217,  218;  capital- 
ized, 218;  principle,  218;  quasi,  218; 
and   value,   204-206;  definition  of, 


7o8 


Index 


.105;  Iradilional  use  of  term,  205; 
from  land,  205;  land  or  ground,  35.5, 
381,382;  monopoly,  369;  natureof, 
373-375;  land,  one  of  many  kinds 
of  rent,  373;  traditional  law  of,  375; 
land,  relation  of,  to  other  rents,  375- 
378;  analogy  between  profit  and, 
376-378;  and  price,  378-381; 
growth  of  land,  381-385;  land,  and 
land  tenure,  385-389;  contract  and 
economic,  386,  387;  rack,  387; 
justification  of  land,  389-393;  con- 
trasted with  wages,  414. 

Rental  value,  206-209,  211,  220-223. 

Reserve  banks,  539-54?. 

Reserve-capital,  511. 

Reserves,  bank,  51 1-5 18;  centraliza- 
tion of,  539,  540. 

Residual  utility,  194. 

Responsibility,  164,  165,  170. 

Restraint  of  trade,  168. 

Returns,  diminishing,  law  of,  63,  212- 
214,  252,  306,  308,  310,  346,  375, 
402,  419;  increasing,  law  of,  253; 
constant,  law  of,  253. 

Revolution  of  prices,  468,  477. 

Ricardo,  1 21-124,  19S,  199,  491;    548. 

Risk,  in  speculation,  364;  application 
of  the  term,  599;  avoidance  of,  600; 
and  progress,  601. 

Rome,  ancient,  economics  of,  i  lo-i  1 2. 

Rural  credit,  546  *. 

Russia,  money  standard  in,  483. 

3AFETY   Fund   System,  530. 

Salaries,  215. 
Sanitation,  laws  regarding,  647. 
Savings  banks,  503. 
Scandinavia,  money  standard  in,  480. 
Science,  internationalism  of,  688-690. 
Scientific  law,  25. 
Securities,  speculation  in,  362,  363. 
Seigniorage,  470-472. 
Self-sufficing  economy,  75-77. 
Sellers  and  buyers,  229-235. 
Selling  bureaus,  343. 
Serfdom,  68,  159-162. 
Sena,  117. 

Services,   and   commodities,   10;    hu- 
man, 214. 
Share  system,  387,  388,  444. 
Sherman  Act,  638-640. 
Shipping  subsidies,  631. 


Short-hand  principle,  591,  592. 

Silver,  new  sources  of,  475;  and  gold, 
changing  relations  of,  476-483;  free 
coinage  of,  480-483. 

Silver  certificates,  489. 

Silver  standard,  in  India,  484,  485;  in 
the  Philippines,  485,  486;  in  Pana- 
ma, 486;  in  Mexico,  486;  in  the 
Straits  Settlements,  486,  487; 
countries  still  under,  in  1914,487. 

Single-tax,  393. 

.Single-taxers,  391. 

Sinking  fund,  208,  211. 

Slavery,  68,  103,  287;  in  Greece  and 
Rome,  no,  157,  158;  in  mediaeval 
times,  113;  beginnings  of,  127;  ex- 
tended, 128;  origin  and  growth  of, 
154-158;  dependence  on  free  land, 
157.  158;  in  America,  157,  158,  160; 
decay  and  disappearance  of,  158- 
163;   traditional  defence  of,  162. 

Smith,  Adam,  34,  76,  118-121,  224, 
297,  318,  425;  566. 

Social  and  individual  cost,  192-194. 

Social  and  individual  value,  179-182. 

Social  economics,  7. 

Social  Insurance,  ch.  xxxviii,  655-668; 
the  reasons  for,  655-657;  forms  of, 
657;  accident,  657-660;  sickness, 
660,  661;  old  age,  662-664;  in- 
vaHdity,  664,  665;  unemployment, 
665-668. 

Social  life,  35. 

Social  science,  6. 

Social  solidarity,  164. 

Social  surplus  and  progress,  201-203. 

Social  utility  theory  of  private  prop- 
erty, 133.  134- 

Socialism,  136;  bearing  of  Malthus's 
doctrine  on,  62;  theory  of,  613, 
614;  one-sided,  614,  615;  as  a 
remedy  for  poverty,  686. 

Sociology,  6. 

Specialization,  293-299. 

Speculation,  360-368;  one  function 
of,  to  avoid  risk,  600. 

Spencer,  Herbert,  68,  163,  293. 

Spinning  frame,  94. 

Spinning  jenny,  94. 

Standard,  multiple,  469;  tabular,  469; 
choice  of,  475-479;  evolution  of 
gold,  477-488;  limping  or  halting, 
480,    481,   487;    adoption   of   gold, 


Index 


709 


in  various  countries,  479-488;  gold- 
exchange,  485-487. 

Standard  Oil  Company,  236,  237,  261, 
343,  639.  640. 

Standardization,  of  labor,  434;  of  in- 
dustry, 434,  435. 

Standing  rent  method,  388. 

Staple  towns,  557. 

State,  the,  7,  130. 

State  banks,  522,  524,  532. 

Static  conditions,  225. 

Statistics,  relation  of  economics  to,  31. 

Steam  engine,  94,  121. 

Steamship,  after  1830,  94. 

Stock  exchange,  363-368. 

Stocks,  330,  331. 

Stock-watering,  275,  276. 

Straits  Settlements,  monej'  standard 
in,  486,  487. 

Strikes,  437-440. 

Subjective  value,  182,  183. 

Subsidies,  629-631. 

Substitution,  principle  of,  142. 

Suffolk  Bank  system,  529. 

Sugar  bounties,  629-631. 

Sumptuary  laws,  169. 

Sunday  labor,  648.  649. 

Supply,  189,  190;  limitation  of,  char- 
acteristic of  wealth,  II,  12;  and  de- 
mand, 199,  223,  224,  241,  244-247, 
416;  elasticity  of,  251-253;  con- 
stant, 251;  joint,  253;  and  demand, 
normal,  equilibrium  of,  25s,  256;  of 
labor,  301-303;  of  money,  456-458. 

Supply  price,  238. 

Surplus,  and  cost,  194-198;  produ- 
cer's, 194;  consumer's,  194;  of 
utility,  194-198;  and  value,  195- 
198;  SQcial,  and  progress,  201-203. 

Sweating,  472. 

Sweatshops,  648. 

Symmetallism,  476. 

Syndicates,  506. 

•yABOO,   87. 

Tabular  standard,  469. 
Tariff,     protective,     102,     149,     170; 

origin  of    the   term,    557;    relation 

to  trusts,  633,  634. 
Taxable  income,  19. 
Taxation,  of  inheritances,   137;    and 

valuation,  269-273;  of  corporations, 

269,  270;   of  general  property,  270, 


27 T,  273;  diffusion  of,  271;  influ- 
ence of  capitalization  on,  271,  272; 
eUsion  of,  272. 

Technique,  primitive,  69-72. 

Telegraph,  574,  621. 

Telephone,  574,  622. 

Tenure,  land,  385-389. 

Theory,  alleged  antithesis  to  practice, 
28. 

Third  and  fourth  system,  388. 

Tobacco  trust,  639,  640. 

Tontine  anniuties,  604. 

Torrens,  666. 

Totem  worship,  87. 

Trade,  freedom  of,  170;  internal  and 
international,  547,  548.  See  Inter- 
national trade. 

Trade  agreement,  447. 

Trade  Disputes  Act,  442. 

Trade  dollar,  453. 

Trade  economy,  77-81. 

Trade-mark,  263,  265. 

Trade  unions,  168;  apprenticeship 
regulations  of,  167,  168,  436,  437; 
restriction  of  membership  by,  302; 
rise  of,  433,  436,  437;  in  the  United 
States,  433;  justification  of,  433; 
militant  and  fraternal,  433;  stand- 
ardizing tendencies  of,  434,  435; 
restriction  of  output  by,  435-437; 
strikes,  437-440;  closed  and  open, 
439;  boycotts,  441-443;  and  trusts, 
635- 

Trading  companies,  97. 

Tramways,  624-626. 

Transmission  of  intelligence,  572-574, 

Transportation,  ch.  xxxiii,  572-597; 
effect  of  improvements  in,  46-48. 

Treasury  certificates,  490. 

Treasury  notes,  490. 

Trial  of  the  pyx,  472. 

Tribes,  87 

Truck  system,  76,  650. 

Trust,  origin  of  the  term,  99. 

Trust  companies,  504. 

Trusts,  97,  99,  153,  343;  the  causes  of, 
632-634;  relation  of  tariff  to,  633, 
634;  object  of,  634,  637;  effect  of, 
634-638;  advantages  and  evils  of, 
638;  question  of  size,  638;  prohibi- 
tion of,  638-640;  regulation,  O40- 
642. 

Turgot,  116,  120,  121. 


JIO 


Index 


UNDERCONSUMPTION,      544, 

545- 

Undertaker,  the  term,  85; 

Unearned  increment,  392,  393. 

Unemployment,  664-668. 

Union  label,  440. 

United  States,  economic  develop- 
ment of,  100-108;  money  standard 
in,  483;  government  banks  in,  522; 
banks  of  issue  in,  524;  exports  and 
imports  of,  551;  protective  tariff 
in,  559.  560;  railways  in,  595. 

United     States     Steel     Corporation, 

347-349- 

Use,  value  in,  182,  183. 

Usury,  410,  411. 

Usury  doctrine,  114. 

Utilities,  conferred  by  objects  and 
services,  10,  11;  law  of  compara- 
tive, 226,  227;  comparative  mar- 
ginal, law  of,  227;  relation  of  con- 
sumption and  production  to,  278- 
281;  material  or  form,  2S1;  place, 
281,  282;  time,  282. 

Utility,  definition  of,  9;  grade  of,  whicTi 
results  in  value,  11;  marginal,  175- 
179,  185-188,  213;  law  of  dimin- 
ishing, 175-179;  total,  176,  177, 
179,  181;  effective,  176,  177,  179, 
181;  final,  176;  individual  and 
social,  179-182,  200;  indirect, 
180-182,  193;  residual  or  surplus, 
194;  surplus,  194-198;  social, 
equivalence  with  social  cost,  197, 
198;  and  cost,  198-201;  ultimate 
cause  of  value,  201;  law  of  dimin- 
ishing, 212-214. 

Utilization,  margin  of,  213,  214. 

yALUATION,  and  taxation,  269- 
273;  and  regulation,  273-275; 
and  investment,  275-277. 

Value,  definition  of,  11,  201;  and 
wealth,  12;  original  meaning  of, 
173-175;  kinds  of,  174;  relation 
to  marginal  utiHty,  179,  180;  in- 
dividual and  social,  179-182;  in 
exchange,  182-184;  in  use,  182, 
183;  subjective  and  objective,  182, 
183;  and  price,  184,  185;  and 
marginal  increments  of  wealth, 
185-188;  measure  of,  189-203; 
relation    to    cost,    190,    ig8,    igg; 


social  nature  of,  193;  as  depend- 
ent on  social  cost,  193,  200;  and 
surplus,  195-198;  as  dependent  on 
limitation,  igg;  is  expression  of  re- 
lation between  demand  and  supply, 
200;  capitaUzation  of,  204-222;  and 
rent,  204-206;  rental,  206-209, 
211,  220-223;  property,  206;  capi- 
tal, and  rental,  206-209,  211,  220- 
223;  of  producers'  goods,  212;  is 
reflected  back  to  original  agent, 
212;  fundamental  law  of,  212; 
forms  of,  214-217;  as  a  differential, 
217-220;  determination  of  market, 
223-240;  depends  on  demand  and 
supply,  223;  determination  of 
normal,  241-261;  normal,  and 
cost  of  production,  250,  251;  the 
general  law  of,  262-277;  of  non- 
reproducible  goods,  262-264;  of 
relations  and  privileges,  262-264; 
and  efficiency,  265-268;  funda- 
mental explanation  of,  is  marginal 
efficiency,  265;  of  corporations, 
measurement  of,  274;  normal,  by 
what  regulated,  255,  256;  normal 
monopoly,  258-261. 

Value  of  service,  255. 

Varying  Cost,  law  of,  251-253. 

Ventilation,  laws  regarding,  647. 

Vested  rights,  136. 

Village  economy,  78. 

Vocational  schools,  667. 

Von  Baer,  293. 

"YyAGE,  the  minimum,  650-654; 
minimum  living  677,  678. 

Wages,  ch.  xxvi,  413-431;  bear- 
ing of  Malthus's  doctrine  on, 
62;  always  income,  215;  con- 
trasted with  prices,  rents,  and  in- 
terest, 217;  law  of,  218,  416;  and 
efficiency,  266,  267,  418-421;  rela- 
tion to  cost,  289,  416-418;  con- 
trasted with  profits,  358;  monopoly, 
369;  nature  of,  413-416;  contrasted 
with  prices,  413,  415;  contrasted 
with  interest,  413,  414;  contrasted 
with  rent,  414;  rate  of,  414,  415, 
421,  422;  money  and  real,  415; 
cost-of-production  theory  of,  417; 
minimum-of-subsistence  theory  of, 
417;    iron  or  brazen   law   of,   417; 


Ind 


ex 


711 


wages-fund  theory  of,  417,  418; 
paid  out  of  product,  418;  stand- 
ard-of-life  theory  of,  421-423; 
productivity  theory  of,  421; 
course  of,  423-425;  differences 
between  actual  and  normal,  425- 
42g;  'relation  to  profits,  429-431; 
and  protection,  561-563;  and 
trusts,  634,  635. 

Wages-fund  theory,  2q,  65,  417,  418. 

Wage-work,  the  term,  90. 

Walker,  F.  A.,  124,  376. 

Walsh,  C.  M,  469. 

Waterworks,  624,  625. 

Wealth,  meaning  of,  8-13;  character- 
istics of,  8-1 1,  13;  original  mean- 
ing of  word,  8;  intangible,  10; 
definition  of,  11,  13,  19;  an  abun- 
dance of  things  limited  in  supply. 


12;  and  value,  12;  and  man,  13-15; 
a  surplus  of  satisfactions,  14;  the 
measure  of  income  and  capital,  15- 
22;  contrasted  with  money,  19, 
20;  contrasted  with  property, 
20,  21;  public  and  private,  21- 
23;  and  population,  antithesis 
between,  64,  65;  right  of  accu- 
mulation of,  137,  138;  limitation 
of,  138;  duties  of,  138;  marginal 
increments  of,  and  value,  185-188; 
concentration  of,  334. 

Weighting,  463. 

W^idows'  pensions,  663. 

Women,  employment  of,  643-646. 

Workmen,  itinerant,  90;  rise  of  in- 
dependent class  of,  91;  and  em- 
ployers, 289. 

Workmen's  compensation,  658-660. 


AMERICAN  CITIZEN  SERIES 

A.  series  of  books  on  the  practical  workings  of  the  functions  of  the  state 
and  of  society,  with  especial  reference  to  American  conditions. 

Edited  by  ALBERT  BUSHNELL  HART,  LL.D.,  of  Harvard  Uni- 
versity, editor  of  Epochs  of  American  History,  etc.,  etc.    Crown  8vo. 

Outlines  of  Practical  Sociology;  with  Special  Reference  to  American 
Conditions 

By  CARROLL  D.  WRIGHT,  formerly  United  States  Commissioner 
of  Labor,  President  of  Clark  College,  etc.  New  Edition,  largely  re- 
written by  Herbert  N.  Shenton,  Columbia  University,  N.Y.  With 
Maps  and  Diagrams.    Working  Bibliographies  and  Index.     {Nearly 

ready) 

Actual  Government  as  Applied  imder  American  Conditions 

By  ALBERT  BUSHNELL  HART,  Professor  of  History  in 
Harvard  University;  author  of  "Formation  of  the  Union,"  etc.,  etc. 
643  pp. 

Financial  History  of  the  United  States 

By  DAVIS  R.  DEWEY,  Professor  of  Economics  and  Statistics  in 
the  Massachusetts  Institute  of  Technology.  Sixth  Edition,  revised, 
1918.     587  pp. 

Constitutional  Law  in  the  United  States 

By  EMLIN  McCLAIN,  Justice  of  the  Supreme  Court  of  Iowa; 
sometime  Lecturer  on  Constitutional  Law  at  the  State  University 
of  Iowa.     476  pp. 

Principles   of    Economics;    with    Special   Reference   to   American 
Conditions 

By  EDWIN  R.  A.  SELIGMAN,  McVickar  Professor  of  Political 
Economy  in  Columbia  University.  Ninth  Edition,  Revised. 
About  766  pp. 

Organized  Democracy;  An  Introduction  to  the  Study  of  American 
Politics 

By  FREDERICK  A.  CLEVELAND.   515  pp. 

Public  Opinion  and  Popular  Government 

By  A.  LAWRENCE  LOWELL,  President  of  Harvard  University. 
429  pp. 

LONGMANS,   GREEN,  and   CO.,  Publishers 
Foixrth  Avenue  and  Thirtieth  Street,  New  York 


RAILROADS,  RATES  AND  REGULATION 

By  WILLIAM  Z.  RII'LKY,  Ph.D. 

Nathaniel  Ropeh,   I'kofessor   of   Economics   in   IIakvard    University 

With  ^1  diagrams  in  the  text.     Small  8vo.     Pp.  xviii-659 


FOR  various  reasons,  railroads  during  the  last  ten  years  have  occu- 
pied a  peculiarly  prominent  place  in  public  attention  in  the 
United  States.  Representing  an  investment  of  about  one-fifth 
of  the  nation's  wealth,  their  affairs  are  a  matter  of  direct  concern, 
through  bankers,  to  thousands  of  holders  of  their  securities  all  over 
the  country.  Every  merchant  and  manufacturer,  in  connection  with 
the  every  day  conduct  of  business,  is  bound,  as  a  shipper,  to  be  inter- 
ested in  their  status.  Several  million  officials  and  employees  are 
dependent  upon  railroad  welfare  for  their  livelihood.  The  general  pub- 
lic,, as  consumers,  is  vitally  concerned  with  the  manner  in  which  they  • 
are  conducted;  and  now,  since  the  advent  of  strict  public  control  of 
rates,  in  the  outcome  of  that  political  experiment.  The  legal  profes- 
sion is  directly  interested  also  — -^y  way  of  the  multitude  of  cases  now 
arising  for  settlement  before  the  various  federal  and  state  railroad 
commissions.  This  treatise,  more  detailed  and  elaborate  than  a/mere 
text-book,  aims  to  set  forth  the  nature  of  the  railroad  problems  of  the 
time,  commercial,  fiscal  and  political;  while  at  the  same  time  avoid- 
ing the  extreme  technicalities  of  the  narrow  specialist.  This  first  vol- 
ume deals  with  the  matter  of  rates  and  government  regulation;  while 
a  second,  in  preparation,  will  deal  with  matters  of  finance  and  corpo- 
rate organization.  Amply  provided  with  footnotes  and  references,  the 
text,  nevertheless,  deals  with  the  subject  in  a  manner  comprehensible 
to  the  ordinary  reader.  Over  forty  maps  and  illustrations  in  the  first 
volume  alone  serve  to  render  the  problems  discussed  more  interesting 
and  intelligible.  It  is  a  work  which  should  appeal  alike  to  bankers, 
investors,  railway  officers  and  employees,  lawyers  and  publicists,  as 
well  as  to  all  students  of  economics  and  politics  and  the  serious  gen- 
eral reader. 

"  Professor  Ripley  is  presenting  the  most  exhaustive  study  of  the 
railway  problem  in  the  United  States  that  has  yet  appeared.  By  his 
intimate  knowledge  of  the  whole  field  of  railway  operation  and  by  his 
attractive  literary  style,  he  has  produced  a  book  that  is  likely  long  to 
remain  a  standard  authority  on  the  subjects  discussed.  ...  A  treatise 
of  high  merit,  and  the  most  scholarly  work  that  has  appeared  since 
Hadley's  book  in  1885." —  The  Nation. 

"Taken  as  a  whole,  Professor  Ripley's  first  volume  seems  likely  to 
become  the  authoritative  treatise  on  the  subject." 

—  The  Economic  Review. 

LONGMANS,  GREEN    &  CO.,      .       -       New  York 


RAILROADS,  FINANCE  &  ORGANIZATION 

IJy  WILLIAM   Z.  RIPLEY,  Ph.D. 

NathanieIj  Ropes  Professor  of  Economics,  in  Harv.\rd  University 
With  29  Map.f  and  dicujrams  in  the  text.     Small  Svo.     Pp.  xx-638 


'"r^HIS  volume  on  Railroad  Finance  and  Organization  is  a  companion 
X  and  a  logical  successor  to  Railroads:  Rates  and  Regulation.  It 
is  not  merely  a  treatise  upon  the  details  of  raili-oad  finance  —  a 
stock  exchange  hand-book  or  a  bankers'  manual.  The  comprehensive 
treatment  of  such  matters  as  the  nature  and  kinds  of  railroad  securi- 
ties, the  course  of  market  prices,  and  receivership  and  reorganization 
should  render  it  serviceable  to  bankers,  investors,  and  members  of  the 
legal  profession.  Likewise,  the  amplitude  of  footnote  references  and 
the  wealth  of  historical  explanation  fit  it  for  academic  use.  But  it  pur- 
ports to  be  more  than  either  a  treatise  upon  private  finance  or  a  college 
text-book.  It  is  "a  constructive  essay  in  government,"  systematizing 
information  for  others  in  a  single  great  department  of  public  affairs. 
Until  witliin  a  few  years,  public  regulation  was  largely  concerned  with 
rate-making,  which  forms  the  subject  matter  of  the  first  volume,  already 
issued.  State  regulation,  however,  has  now  spread  over  into  the  field 
of  finance.  Partly  as  a  result  of  grave  losses  to  investors  through  mis- 
management and  dishonesty;  partly,  and  to  an  increasing  degree 
within  the  last  decade  because  of  a  belated  perception  of  the  economic 
truth  that  all  phases  of  the  great  business  of  transportation  are  inex- 
tricably entangled,  legislators,  public  officials  and  property  owners  have 
been  brought  face  to  face  with  a  large  number  of  financial  problems. 
Among  these  are  the  regulation  of  the  capitalization  and  financing  of 
public-service  corporations,  the  determination  of  reasonable  rates  and 
physical  valuation.  These  questio  is  are  discussed  in  a  large  way,  keep- 
ing the  collective  interest  in  view;  but  recognizing,  nevertheless,  that 
the  encouragement  of  private  capital  by  the  prospect  of  a  satisfactory 
return  upon  its  ventures  is  essential  both  for  adequate  service  in  the 
present  and  for  the  future  development  of  the  greatest  single  material 
agency  upon  which  the  industrial  life  of  the  nation  depends.  Many 
diagrams  employed  in  lieu  of  statistics  and  a  number  of  maps  serve  to 
clarify  the  text,  and  to  make  it  interestingly  readable. 

LONGMANS,  GREEN    &  CO.,      -      -      New  York 


UNIVERSITY  OF  CALIFORNIA  LIBRARY                                J 

Los  Angeles                                                                ■ 
This  book  is  DUE  on  the  last  date  stamped  below.                             ■ 

V  1^ 

aeiaiREl^. 

|gC  1  8  1961 

?EC'D  MLO 

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iV     ^  ^ 

.  1984 

DEC  241^ 

1 

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"    uiDrary 


HB171.5.S46   p9 


L  009  596  398  9 


